Sorry to hear about your difficulties. It sounds like there are two main problems you are encountering:
1) Poor quality of exported AVI files
Are you sure you have your QuickTime settings correct? In the Export dialog box, after selecting "Movie to AVI," there should be an "Options..." button available, and within the options, you can increase the quality settings (resolution, frame rate, etc.) to practically anything you want.
2) Flip movies are grayed out in iMovie
I have iMovie 08, and I am unable to confirm this. When I try to import Flip videos into iMovie 08, they are fully enabled, although there are some other compatibility concerns (as mentioned in your post and in my review).
iMovie 08 has several commands with "Import" in their names. Are you sure you are going to File->"Import Movies..."?
-------------------- Chief iPod Correspondent
Senior Time Waster
Captain of the Planet Express
Assistant Jedi Librarian