I believe they disabled the use of 3rd party memory cards. I say this, because I have a USB HDD plugged into my 360 for the purpose of watching movies and TV shows. The Media Player on the 360 recognizes the drive just fine, and reads the video files without issue.

I would prefer to stream them across the network, but I got really frustrated with the XP and XP Media Center setup that MS required. It never worked well, and TVersity never really worked the way I wanted it to either. It's an ok solution, but I find a USB HDD to be a better one.