The PS3 supports common file formats such as AAC, JPEG, MP3, and MPEG-4 video, but will not play WMV (Windows Media Movie) and WMA (Windows Media Audio). If you are like me I have tons of AVI Video files. Most of them are in the form of Divx, Xvid and other forms. To play them on you Sony PS3 (PlayStation 3) you must convert them to MP4, MPEG-1 or MPEG-2 format.
You will need a program to convert them over. I have tried a few and I find PS3 Video Converter to be the best of the bunch. PS3 Video Converter allows you convert multimedia files to PS3, PSP video format MPEG-4/ AVC with real high-quality which could be played on PS3 and PSP. In addition, it supports the output files as definition 480p/720p and 1080p. It support H.264/MPEG-4/AVC Video Format and MP3/AAC Audio Format. Designed for PS3.
There is also a free converter developed by Red Kawa. PS3 Video 9 is a free video conversion application. It allows you to convert your computer video files (like avi, divx, mpeg, etc.) into the specific video formats that are playable on the PlayStation 3.