I imported some avi (divx) files into iMovie. It was going to take forever to actually export the new file according to the specs below. So, I just grabbed the .mov files from ~/Media directory under the project and synced it. And, it worked!
http://www.apple.com/iphone/specs.html
Video formats supported: H.264 video, up to 1.5 Mbps, 640 by 480 pixels, 30 frames per second, Low-Complexity version of the H.264 Baseline Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; H.264 video, up to 768 Kbps, 320 by 240 pixels, 30 frames per second, Baseline Profile up to Level 1.3 with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats; MPEG-4 video, up to 2.5 Mbps, 640 by 480 pixels, 30 frames per second, Simple Profile with AAC-LC audio up to 160 Kbps, 48kHz, stereo audio in .m4v, .mp4, and .mov file formats