Another way to do it is..
If you're on windows, download Windows Media Player 11. Open it up, and go to Tools, i think, and then Media Sharing. Turn your Xbox 360 on, sign into live(Make sure your PC and Xbox are on the same router of course
). Click enable media sharing, then it'll show you which devices your'e allowed to share to. Your 360 should be on the list (It has to be on, and on live for this step) highlight it, and click "Allow".
Then, place any movies you want to watch into the "My Videos" folder.
Then, on the 360, go to the Media blade, go to Videos, hit X, and select your PC. Then, all your videos will be there. This allows you to stream videos from your pc to your xbox, but sometimes can be laggy if you have heavy network load. but, the pros to this is no conversion or external storage is needed.
I hope you don't see this as me trying to steal the thread, just trying to help my fellow gamers out by showing you guys one of the lesser-known ways of watching movies.
For Linux users, sudo apt-get install ushare