There's now new support for video playback on the 360.Where as before you could only play DVD or WMV files, there's now a new optional update available for download (around 2mb) that allows various MP4 formats, in fact everything i've thrown at it, it's played back fine. So DivX, Xvid even M4V podcasts!
How to Install: the easiest way is to connect to xbox live (silver membership will work fine) and then go to your media player and try and launch a video file. The side tab will pop in saying that an update is required and you can select to update now. After the update is downloaded return to the media folder an try again to run the video, done!
Great features include fast forward/rewind, screen re-size, full screen, bump forward/backward (like dvd chapters) and resume playback when returning to watch a video you didn't finish.
It'll play files either from a usb flash drive, or off a disc (cd/dvd) and i presume over the network if you've got it setup to recognise your pc. If you cant see your videos, make sure you press (X) to change the video source.
Update: the only issue i've found is that if you leave your xbox disconnected from xbox live for a length of time, then it fails to recognise the update has happened, connecting it to xbox live will resume playback functionality without having to download again, weird eh? maybe the next dashboard update will fix this.
http://cc.fullcirc.com/screencast/tips/website/
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