nope, the xbox supports various codecs. One of them is indeed xvid/divx. But also the h264 codec is supported.
This means that you can watch a lot of the hd series posted on the web, the problem is that you often need to recode a little bit. The xbox only supports a select number of different containers like: avi, mpeg, mp4 and wmv. Most of the hdrips are posted as mkv's, although its still the same codec, your xbox will not understand the format. There is however an easy fix that can be achieved by various programs. One of them is
GoTsent. With this program you can extract the video and audio from a mkv file and put it in another container such as mp4. With GoTsent this will only take 5 minutes. (because you dont need to recode the entire video).
The only downside to this method is that you are restricted to stereo audio since the xbox only supports 5.1 sound when it comes in a wmv container. A lot of the movies/series posted on usenet can be downloaded as hdwmv, giving you hd quality videos and 5.1 sound.