Nero does offer AVI as an option. I don't see XviD though. I'll take a look at Freemake. Appreciate the suggestion.
The Xbox 360 Supported Video Formats section at This link
confuses the heck out of me. It lists MPEG-4 Part 2 twice. One mentions 5.1, the other doesn't. And, is there a difference between MPEG-4 and MPEG-4 Part 2? I suspect I need a primer on all the video formats/codecs.
I'm not sure about WMV, but the Xbox definitely dropped support for WMA Lossless. I ran into this limitation pretty quickly as this is how my entire music collection is ripped. In fact, I just discovered the workaround to this is to stream from my PC to the Xbox System Music Player. Not ideal, but I can live with it.
To your larger point, I am thinking about throwing in the towel on the Xbox. I actually do have a WD Live on our secondary TV. Use it daily for Netflix and Hulu Plus. My few attempts at using it for media files have been disappointing... not a very intuitive user interface.
I'm seriously thinking about picking up one of the Oppo BDP-93 players that have the old firmware to play ISO. Boy, what I wouldn't give to be able to get my entire DVD-A, SACD, and Blu-ray music collection on a media server!