[Eiji]

I found a great guide on how to convert 720p/1080p video sources to high quality H.264 video files that play fine on the Xbox via XBMC.

[XBOX] HOW-TO encode videos in H.264 to be able to achieve playback on the Xbox - XBMC Community Forum

I have converted a few videos using the method outlined in the above thread and quality is indeed higher than DVD and there is no stuttering. Its best to stick with a horizontal resolution of 720 and not any higher as any higher and the poor Xbox can begin to stutter on playback.