.AVI is not supported on the iPhone.
You can have a movie available in iTunes that plays in iTunes/QuickTime but if the movie is not in an iPhone compatible format, the movie will not transfer to the iPhone via the iTunes sync/transfer process.
http://www.iskysoft.com/convert-mov/convert-avi-to-quicktime-mov-mac.html
And converting an AVI file to a MPEG-4 or .MOV may not be enough.
Copied from this link.
http://www.apple.com/iphone/specs.html
Video formats supported: H.264 video up to 720p, 30 frames per second, Main Profile level 3.1 with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; MPEG-4 video, up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Simple Profile with AAC-LC audio up to 160 Kbps per channel, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; Motion JPEG (M-JPEG) up to 35 Mbps, 1280 by 720 pixels, 30 frames per second, audio in ulaw, PCM stereo audio in .avi file format.
Some conversion utilities include a default iPhone/iPod compatible format for the conversion. The one I use includes this option along with a default Apple TV compatible format. Since I have an Apple TV, I use the default Apple TV compatible format for the conversion which also allows me to transfer the video from my iTunes library to my iPhone as well.
