The previous answer was very misleading. It implies that iTunes can't be made to play AVI files. That is not true. If QuickTime can be made to play AVI then so can iTunes and FrontRow. The following open source component is free, and a piece of cake to install (as shown in the hand-holding video on its site). See "perian.org".
Installing perian will immediately make QuickTime player and FrontRow be able to play AVI files. Stick your .avi files inside your "Movies" folder so you can navigate to them in FrontRow (without having to trick iTunes into importing them).
To import into iTunes, one more trick is needed since itunes doesn't recognize .avi files...they need to have a special sort of alias file created for each. Apple provides the free developer program MakeRefMovie which does that. (The program is all over the web if you don't really want to sign up for free developer status...google "download MakeRefMovie")
Quick Tutorial for this whole process here-->
http://flynnsarcade.net/index.php?option=com_content&task=view&id=62&Itemid=36
Gory details tutorial for MakeRefMovie here-->
http://www.apple.com/quicktime/tutorials/refmovies.html
Message was edited by: polyglotinc
got rid of square brackets in msg.