I use AA Nimh batteries for almost everything - they're cheap, $2-$4 each, relative high capacity, 1600-2200mAh, and you have a wide choice of chargers . I'm thinking of just putting the appropriate connector on a 6 cell holder and using it as a hip battery.

Will this work? Is there anything I should watch out for?

As long as you get the 7.2 Volts DC it sounds OK to me.
(the cam requires approx. 7 Volts for operation right?)

yeah! one more basic thing.
Because its DC, watch out for the polarity. Dont want to burn something by accidently reversing the DC supply polarity.

Beware of building your own. Commercial units are engineered and hopefully a little thought has gone into them. The companies have done things like install fuses or power interruption devices, used matched cells. After all when its attached to a $3,000 cam you don't want Jake Leg's Homebuilt supply roasting it.

Believe it or not, most batteries are just what Joseph described. They should be "smarter" but most aren't. Exceptions include the Sony Infolithiums which have a chip to communicate to the camera, and similar technologies by other manufacturers. With these products, often you cannot power the device with a "dumb" battery system--it won't recognize it.

Another fabulous power source that is available, inexpensive and powerful are power tool batteries such as DeWalt and Makita. Available in multiple voltages (including 7.2 volt) and using inexpensive chargers, they can run your camera all day. I'm setting my XL1 up with a Dewalt battery system. The batteries can be bought ANYWHERE and cost between $25-50 depending on size, the chargers cost around $50. You will need to buy their cheap flashlight housings (maybe $25), then chop off the flashlight end and attach whichever connector to the power cord.