One problem with iMovie '08 in particular is that it has more strict technical requirements for the codec implementations that it will allow (they have to be thread-safe). So the first question is: can you open the AVI in QuickTime Player?
It would help to know the codec. AVI is like the box that a pizza comes in; no one cares about the box. (Well, not quite that bad.)
In the end, you want to be able to edit the clips directly in iMovie. Translating them first into another (lossy) format will reduce the quality. If you are forced to do that, you should use a format like Apple Intermediate -- that's what it's for. MPEG-4 is a "distribution" codec (and confusingly, also a file format), not intended for editing.