I believe iMovie requires .dv files for editing. Your best best is to use VisualHub to convert the avi to dv, then bring that into iMovie.
You can convert them to dv using MPEGStreamclip. Its free and quick.
Squared5.com
i am having the same problem (i cant upload avi files into imovie with out loosing the visuals) what is a visual hub, where can i get it, and how do i use it...