Are there any updates on this? I just set up my 360 to be an extender and was unpleasantly surprised to see that it didn't support divx files in the MCE interface. In any case I installed Transcode 360 as Ian suggested but still could not get my 360 to recognize the divx/avi even though it plays fine in Window Media Player on my Vista machine.
Any thoughts or suggestions on what I'm doing wrong? Thanks.