Adding .avi files to itunes?

No. An AVI file is just a container for data. You can stick in mpeg1, 2, or 4 video and have it play. You will need to convert the file to a format iTunes can understand.

 

Not necessarily.
I even have .wmv's in my iTunes ...

Here's how:
Open the AVI file with Quicktime. Then select 'Save as ...' and choose the second option (references). This will create an additional small MOV file.
Add this MOV file to iTunes and that's it. You can now play your AVI file in iTunes without converting, albeit because of some small workaround.

Mind you, when you sync it to your iPod and/or iPhone, the actual movie won't be on there, just the reference.

So if you want to view it on your iPod/iPhone, you have to convert.
If you just want to watch the movie in iTunes, this is the way to go.