According to an article on GamesFirst, a free application called Transcode 360 allows XBOX 360 owners to playback DivX and XviD encoded movies on their consoles. Although the console itself doesn’t actually decode DivX and XviD in real time, the movies play back without a hitch. The process involves transcoding one video format into another — in this case, it’s a format that the Xbox 360 can actually decode. The applications requires a Windows XP PC to perform the actual codec translations but will allow users to use their XBOX 360 to actually view the media.
You’ll still be required to have your Xbox 360 connected to a MCE PC, but this is going in the right direction. Check out the full posting at DailyTech.