Jonny has released a new version of his modified PMP (PSP Media Player).
PMP is a great video player, which can currently play many formats (DivX/XviD included!). Unfortunately, for now, you must use one of the many programs to convert the AVI files into a PMP file, to play it.
A changelog, from his site:

• All the problems in the "Common problems" section are corrected
• Muxer: improved avi parser (more compatibility and support up to 4GB avis)
• Muxer: improved mp3 parser (more compatibility, wild search for mp3 frames)
• Muxer: a log file is written at the end (GUI programmers can use the last line of this log for error checking)
• Muxer: the tk version should run on linux with no modifications now (please someone should confirm this)

You can download both the player, and the program needed to make the PMP files here.