Keep in mind that AVI is just a wrapper format that can contain content encoded with any number of codecs. Just stating "AVI file" doesn't really mean much even if the format itself is supported.
You may not be able to play the AVI format directly but you can convert it to 3GP format for the Droid using one of the converters listed in this thread:
yxflash is in the market and plays .avi files without any sort of conversion. Tried it successfully last night. It did stutter a bit here and there though. The app is free to Trial, then $10.