This is the formula I followed to get the avi files from a digi cam to play right.
How to convert videos and transfer them to the Samsung Galaxy S - Know Your Cell
Rockplayer and Arcmedia would sorta play them but very distorted until converted. Now stock gallery player or mvideo player works great.
Also make sure you unlock your VOD stuff for full divx use like post 19 mentioned since it's kinda hidden away in the settings menu.