Where my room is in the house, I don't have an internet connection. I took my 360 down to the router, plugged it in and did the optional media update. I then put in my thumb drive and tested to made sure it worked and the movie played.

I then unplugged everything and took it back up stairs to my room where I don't have access to internet and connected everything and tried to play that same movie .... and it doesn't work. It gives me the same prompt that I a media update is required. Weird.

I take it back downstairs, and as long as I'm logged into an account with an internet connection, the media source plays exactly as it should. I bring it back upstairs .. same issue saying I need to sign into XBOX Live and do the update .. which I've already done.

Suggestions?

That is strange indeed. If you go to your memory management while offline, do you see the blocks for the Media Update?

Think this may be already answered in a different topic,

Connect to the Internet and use a profile that has not downloaded the media update before (create one if needs be) try to play file, download update, then play file, disconnect from live, switch profile back and play file.

Worked for me.

what happens is the media update is locked to the first console its downloaded on with a given gamertag, and any subsequent consoles will need to be online and logged in with that profile in order to use the media update