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Yeah I'm not aware of any Apps that are going to allow you to play .avi or other formats on the phone. I recommend Videora for PCs or Handbrake for Macs to convert the file to the .mp4 format necessary to play them within the iPod on the iPhone.
VLC for iphone should be out pretty soon and should play avi ogg wmv etc...
It is in beta right now and if you donate to the ZodTTD.com dev team you can give it a try.