Yeah I'm scatching my head a bit as well over this one, especially since it's meant to be part of a media hub. Quite a curious limitation. Is there any way to get videos copied to the 360's hdd at all? I basically have moved the 360 to a spare room, a gym room of sorts, and I've encoded my P90x dvd's to h264 videos with all the crap removed, now I just want to copy them to the 360 and play them from there as needed. Thought it would be a simple thing, but oddly it's turning out to be more involved that expected!
Hasn't it always been like this, from the day that people first connected an iPod or similar device to the 360 - you can play the songs from that device, but you can't copy them locally?