Here is what I dug up on Team Xbox
31. Xbox 360 is supposed to be a digital media hub, Can it play Divx or Xvid content? My current DVD player can but what about 360?
No, the Xbox 360 won’t be able to play MPEG-4 variants other than Windows Media. http://features.teamxbox.com/xbox/1245/Xbox-360-FAQs/p1/
but then on # 40 they say this
40. Will the Xbox 360 play video from any Windows XP computer, or just media center PCs? What codecs is it going to play? DivX?
In order to stream content from a PC, you’ll need the Media Center edition of Windows plus the latest Update Rollup that will allow you to stream digital music, videos, photos, and standard and high-definition television and movies from Media Center PCs to any television in their home via the Xbox 360 gaming system.
The good news is that Windows Vista, the next-generation Windows due out in 2006, will be Xbox 360 compatible right out the box, without requiring a Media Center edition of Vista.
Regarding video codecs, the Xbox 360 will be play anything that a Windows Media Center PC streams to it, so the question of the codec applies more to the PC, not the Xbox 360 which simply act as an extender.
So it is still unclear.