I use a program called TVersity.
Its still very much in its infancy, it does crash every now and then and theres little things like the config program never shuts down cleanly and requires killing from the task manager.
However, if used with the latest ffdshow, it can transcode pretty much everything for use with the xbox 360. Although there are still a few divx's and xvids which decode fine on the computer but not over the network to the xbox, still trying to crack that one.
A side benefit is it also support streaming to PSP and other devices so I can watch the odd movie in bed too
Other alternatives are:
Windows Media Centre edition with additional software (as per the instructions on the xbox360 GUI), Windows Media player 11, but don't know if this transcodes anything other than Windows Media Video files and apparently Vista comes with all the gubbins necessary to do it aswell, but its a bit early to upgrade ot Vista at the mo.