We didn't notice this until @pivale pointed us towards PCWorld's article, but sure enough according to Apple's iPad tech specs, the iPad does indeed support a type of .AVI video:

Motion JPEG (M-JPEG) up to 35 Mbps, 1280 by 720 pixels, 30 frames per second, audio in ulaw, PCM stereo audio in .avi file format

No .AVI support of any kind is listed under iPhone or iPod touch tech specs. (Then again, none of those devices are running iPhone 3.2 like the iPad -- yet).

.AVI, the audio-video interleave is a container introduced by Microsoft. Motion JPEG is a type of .AVI compression. While .AVI in general is ubiquitous for standard definition video content on the internet, there's no indication Apple is supporting the specific XviD codec (encoding/decoding) used by those files.

In other words, and as pointed out in comments below, this will help owners of some types of video cameras watch their footage via the camera card reader accessory, it won't let anyone watch their bootleg