A Dutch Xbox fansite (X Life) is reporting that Microsoft will officially support DivX and XviD formats directly on the Xbox 360 within two months time. While hack-happy 360 owners have been able to play DivX movies for a while now, the move -- if true -- would allow the console to play said video formats without the use of transcoding that converts DivX movies to WMVs on the fly.
From a Microsoft retailer training session (translated from Dutch): "After the event I had a short talk with the host and asked him whether there'd ever be support for DivX and Xvid playback. Much to my surprise, he started telling me that Microsoft is working hard to implement this and a firmware update is expected within 2 months allowing you to play DivX and Xvid directly on the 360."
This is only one rumored account "from some guy," so don't get all giddy quite yet.