Use iTunes "convert" function
The iPhone won't play all video formats that iTunes will, and it appears that iTunes is smart enough to know when a video can't be played by iPhoto (in that case, the software won't synch the video). However, iTunes will convert a video to a format that can be played on iPhone, which then will synch to the iPhone.
To convert the video, select the file you want, then click under the "advanced" menu and select the "convert selection for iPod" option. iTunes then will re-encode the selection and you can copy it over.
I'm not sure if iTunes 7.3 optimizes the resolution for iPhone as opposed to other (lower resolution) iPods, and I suspect not. However, at least this should let you copy your videos over to iPhoto.