When enabled through a registry hack, Zune Software is able to add .avi files in the library. You still can't watch divx videos with the Zune software but you may be able to transcode them and put them on Zune!

KingJehu, a member of the ZuneScene forums has created a .reg file that when installed does the required changes in your registry for this to happen. We haven't still tried this. Others claim they had success when doing this others not. Also divx looks to work better than xvid.

A similar approach by snrsuave is to rename the .avi file to .wmv . This also seems to work. We'll get back to this when try it ourselves.

links: KingJehu registry hack | KingJehu thread | snrsuave thread

Thanks Mauricio for the tip.