The Spring 2007 Dashboard update for the Xbox 360 adds H.264 playback support. H.264 is a very advanced video codec used in Blu-ray/HD DVD, and offers better quality and smaller file sizes than DivX/XviD, at the cost of slightly more processing power (and encoding time).
Processing power becomes less of an issue with the powerful Xbox 360, and since the Xbox 360 does not support DivX/XviD (and is unlikely to do so), H.264 then becomes an ideal format for those that don't want to use WMV.
Please note that some people have had success with playing back standard resolution MOV (QuickTime) and certain high resolution MOV (QuickTime HD) files directly without further re-encoding, so you might want to try this first. QuickTime HD files are already encoded using H.264, but some are encoded using settings which are incompatible with the Xbox 360's H.264 support.
You can go here
to learn how to convert your video files to H.264 files to play on your XBOX 360.