The reason H.264 does not currently work IS because of super buggy code that is out there. There are only 3 H.264 decoding codecs that work. There is only ONE H.264 ENCODING codec that works. That being said, nobody bothers to follow instructions when doing these encodes either, so the third problem is invalid H.264 encodes all over the place.
So far only ONE fansub group has actually produced a PROPER H.264 encoded file. Their normal XVID encodes were 220+Mb. The H.264 encoded file was 85Mb. Nearly a 3 to 1 ratio in file size difference - for higher quality video and better sound to boot.
That being said, there are some excellent instructions out there to produce a H.264 file PROPERLY and get all the space savings and great video and audio out of it. If all the fansub groups would use it, then maybe people might take the time to find out what type of install they have to go through to get H.264 to work on their systems.
Here are some tips:
(1) The most recent version of ffdshow wont work properly with it - you need a specific version
(2) MKV requires it
(3) There is a great OGG package that will work properly - if all you ever watch is OGG files
(4) The Satsuki Decoder Pack will do it with a past version, but not a recent version - the ffdshow issue
(5) You need the Microsoft H.264 releases for both Direct Show and VFW - good luck getting them!
(6) Buy QuickTime Pro and let everyone switch to using .MOV files - you can encode H.264 correctly using QT Pro...
Anyway - have fun! It's a pain in the rear, but you need to support all 3 versions of H.264 that are out there since you won't know which encoder the person used... Check out the Animesuki forums for their H.264 discussion threads for some definitive websites to visit and directions for encoding.