Ok I have just purchased a 360 Premium (wireless with HDD etc) and decided to sort out some of these questions. I am new to these forums also but will help in any way I can.
Playing Video media on Xbox360HOW IT WORKSYou can stream video media to your xbox directly using a network connection. you must have a fairly decent pc and have your xbox360 connected to it via wireless or network cable, what I mean is the pc and the xbox360 must be networked. The xbox360 does not need a HDD unit for this to work, nor do you need any codecs or media software on the XBOX360, everything you need on the XBOX360 end is inlcuded when you buy it (premium consoles with hdd come with sexy remote though ). All of the hard work is done by the PC, the media is streamed (decoded and played on the pc, with the images /sound only being sent to the xbox in near realtime). There are certain things you need to know for this to work, most is discussed on many other websiter including the official XBOX website FAQ and forums.
-You MUST have XP Media centre 2005 sp2 (as at 17th sept 2006 standard xp does not do video, only music and pictures, hence i suggest that you aquire XPMCE2005, less hassle does everything. I could not find any software mods for standard or pro xp to do what mce does ). Obviously your pc must be good enought to run this OS.
-You will need the Xbox 360 media centre extender software from the xbox official website (go to media/media centre in xbox360 console for the website.)
-If you want to play non supported video files you will need the appropriate codec on your pc, aswell as extra software to recode the video or to transcode it (recoding on the fly).
-You will need to authenticate the XBOX with XPMCE, to do this go to the Media Blade on the XBOX360, select media centre, and follow the instructios. It will provide a code that you can then enter into the extneder software on the PC. Basically all it is doing is making a user account in media centre for that particular XBOX360, which is needed to stream the video media.
\\\\All of this is pretty straight forward, after the code is entered you can select the folders/drives on your pc you want to share./////
The tricky part is the fact that MS only included streaming capabilities for a very limited number of video file types. When you try to play .avi, Xvids or 99.9% of any compressed video files via streaming on the XBOX360 it gives a message like "cannot play media, file is corrupted or codec not present"
Within 3 minutes of searching google under XBOX360 CODECS i had all the info I needed.
2 ways to play your media
TRANSCODING- process involving Software that will decode the video file, and present it to the XBOX360 in a format it understands and can play. It does this on the fly, which means that it will do this while you are watching the video media.
Transcoding is awesome, it means you dont have to spend any time recoding everything, and leaves your media in the same format you had it in to begin with, so it doesnt make any permanent changes to the video as such. The downside is that it chews PC resources, depending on the original file format it can make your pc practically unusable until you finish the video. I reccomend "Transcode 360"
RECODING- Process involving software that decodes the video, and then recodes it or leaves it in a raw format, you can then play it on the 360.
Recoding is tedious and requires you to get your pc to change every file you want to play into a format the 360 can play. you cannot watch the media at the same time, you need to change it before you can watch it It alters the file, so when you recode it it is a different file then what you started with. The upside is that it uses less PC resources when you are playing these on your 360 then if it is transcoded. I cant recommend any because I dont use this method, but someone mention the software I would look at first earlier in this thread.
I went with the transcoding option, and am pleased to say that I can now watch all of my ingame videos ( I record alot of demos in pc games, and like to watch demos recorded by others aswell) and free web tv show on my television, Thanks to a program called "Transcode 360". It is free and easy enough to find on google.
To play using transcode 360 you need to highlight the video file on the xbox, but instead of pressing enter or play (will still return same error) you hit info (only on xbox media centre remote with premuim pack) which will give you a little menu, select "more info" and press "Transcode" and your video will play.
IF YOU WANT THE MOST OUT OF YOUR 360 FOR MEDIA-BUY A PREMIUM CONSOLE OR BUY THE REMOTE (hre in Australia the remote + core = premium price anyway)
-Make sure you got XP MEDIA CENTRE 2005 SP2
-Get TRANSCODE 360 (Its free but you can make donations to suport their great work)
then you can do much more with your XBOX 360

If anyone wants to add more to this post or use info in it go right ahead, I am not great at writing stuff like this but I hope I helped. Most of this information is easily accesible elsewhere on the net if you care to take 5 minutes to look.