The Spring 2007 Dashboard update for the Xbox 360 adds H.264 playback support. H.264 is a very advanced video codec used in Blu-ray/HD DVD, and offers better quality and smaller file sizes than DivX/XviD, at the cost of slightly more processing power (and encoding time). Processing power becomes less of an issue with the powerful Xbox 360, and since the Xbox 360 does not support DivX/XviD (and is unlikely to do so), H.264 then becomes an ideal format for those that don’t want to use WMV. Please note that some people have had success with playing back standard resolution MOV (QuickTime) and certain high resolution MOV (QuickTime HD) files directly without further re-encoding, so you might want to try this first. QuickTime HD files are already encoded using H.264, but some are encoded using settings which are incompatible with the Xbox 360’s H.264 support. The PS3 also supports H.264 playback, and you can view the PS3 version of this guide here – the PS3 has an advantage over the Xbox 360 in that it supports AAC 5.1 channel audio (although with limited decoding support).
Make sure you are able to playback H.264 clips on your computer first. Consult H.264 Playback Guide if you are unsure.
This guide uses MeGUI to provide the H.264 conversion from a DVD source or from other file formats (AVI/DivX/XviD/MOV/HDMOV – many other formats, such as MPG, are also supported). MeGUI is one of the newer tools that’s been designed with H.264 encoding in mind. This guide is very similar to the MeGUI H.264 Conversion Guide, except it simplifies a few things and the H.264/MP4 file produced has Xbox 360 compatibility in mind. It also covers how to playback the MP4 file on your Xbox 360 using the TVersity or Zune software.
This guide is aimed at intermediate users that already have some knowledge in regards to video conversion. As such, basic knowledge of things such as framerate and resolution is recommended (and since you are here to experiment with H.264, this assumption is not all that unrealistic). You will also need to know some network basics for Xbox 360 to Zune software connection, such as knowing what your network IP address is, configuring your firewall or port forwarding if your computer is not on the same LAN as your Xbox 360.
Read Complete Guide : Here
NOTE : All Credits to DVDGuy @ Digital Digest