The Xbox 360 Dashboard update released on 4th December 2007 added support for playing DivX and XviD videos natively, i.e. without installing Transcode 360 for Windows Media Center. Unfortunatelly this only works for media played directly from the dashboard and not within Media Center Extender. Since I didn't want to copy my videos to CDs, DVDs or other external devices, the only thing left to do was to setup Windows Media Player media sharing which I never had to use before.

This turned out to be more difficult than I expected - the reason being that the media I wanted to share wasn't stored locally but on a separate file server. By default such media is not shared and there are few steps one has to follow to make this work, as thoroughly explained here:

• Enable remote content sharing by adding the following entry into the registry:
  [HKEY_LOCAL_MACHINE\SOFTWARE\Microsoft\MediaPlayer\Preferences\HME]
  "EnableRemoteContentSharing"=dword:00000001
• Grant anonymous users access to the shared folders on the file server by adding the read permission on the folder and on the share to the ANONYMOUS LOGON user
• Modify the file server's group policy to allow anonymous access to the selected shares by listing them in the Network access: Shares that can be accessed anonymously policy in the Computer Configuration, Windows Settings, Security Settings, Local Policies, Security Options branch of the group policy tree (just run gpedit.msc to start the Group Policy Object Editor)