Yeh up until yesterday you could by vlc from the app store which would allow you to watch avi, divx, mkv etc which were saved to your iphone but it was removed... if you jailbreak you can now get vlc from cydia (cydia is installed when you jailbreak)
there is an app called vlc streamer currently on the app store for £0.59 which allows you to watch all your movies that are stored on your pc/laptop via wifi
Ste