The Zune software was updated to v4.2.202.0 now...and it looks like it plays AVI files now. Went to go sync some songs, and it prompted for an update. Updated it and then I went through the music and movies tabs on my collection tab in the software, and a bunch more files came up (from my Movies HDD). Looks like it plays XVid now...just not DivX from what I can tell sadly.
Oh and this is interesting as well: Updated Zune software drivers hints at Zune “Phone†– istartedsomething
Oh and this is interesting as well: Updated Zune software drivers hints at Zune “Phone†– istartedsomething