If you want to not use media center and just use shared media dicx still works fine just not mkv.
If your going to use a USB drive then it has to be fat32 formated xbox wont read NTFS drives.
I stil rip all my DVDs to dvix, i know MKV is "much better" but divx is more universal and i can use it on all my devices, xbox,ps3,DLNA enabled tv and bluray player so i just have a huge media libary set up on my main pc which acts as a server and share around 10tb of data all around my house. Music pics and video.
I just wish there was a affordable way to back it up because i really couldnt live with ripping that lot again it would be soul destroying.
PS some older divx files dont work if your downloading stuff and also be careful with some audio codecs as they can be the main probelm (DTS dvd rips caused me some issues)