What are you using to stream the video to the 360?
When I had XP installed,
Tversity did a fine job streaming divx. There were some problems with functionality, but that was months ago and I'm sure they've worked those out by now. With some finagling, you can get a very pretty picture.
Now that I use Vista, and by extension, I don't have to go third party as the windows media center extension lets me use
transcode 360. Not much in the way of tweaking available, but I have no problems with divx files.
Of course, this assumes you want the divx format in the first place. Incidentally, I know transcode 360 supports the native DVD format (it streams video_ts) , so, in that case you wouldn't have to convert or rip to specific file formats unless you just wanted to... I don't know if tversity does the same.