Xbox 360 Update
I have tried out the Xbox 360 online update to get it to play.avi files from my usb drive; and yes it works! Just be sure that you update your Xbox 360 through the internet (even if it's a "recently" made unit, since it may not have the latest software updates). Now I can watch my movie files right from a USB drive without having to connect a computer or laptop to the television each time. Sweet!