As per the TVERSITY Website:
Transcoding of some file formats require the installation of third party directshow filters that are compatible with TVersity. TVersity recommends:
ffdshow - for MPEG2/4, H.264, Divx, Xvid, AAC, FLAC, Vorbis, FLV, and many more
Haali Media Splitter - for better MP4 and H.264 support and for OGG/OGM and Matroska.
Real Alternative - for Real audio and video.
Quicktime Alternative - for MOV.
MP4 Source/Splitter* - for better MOV support.
FLV Splitter* - required for FLV playback.
(this is taken from there download page which has links to the various files)
After installing TVersity and the third party programs, I had to reboot.
I then added media to the play list. My first run was very grainy using the default settings. It looked horrible. I tinkered with the settings, upped the resolution, set the transcoder options as follows: NOT decrease bitrate if too high for my network (My computer and 360 are both on LAN), optimize for quality is checked, my connection speed is wired, video resolution of 600x480 (I also tried 1280x1024 and it seemed fine too but no appreciable difference...probably because of my 360's settings...anything over 480 vertical lines is probably overkill for me.), and NOT decode the media as fast as possible. I really wish I could have 1080 output from the 360 in 4:3 aspect... I'm not going to switch video modes back and forth just to watch things in higher quality on my console. Maybe I'll setup streaming to my xbox...it'll do some pretty cool stuff.
Of course your settings will likely vary depending on your computer's speed and other environment factors like network speed, wireless vs wired, etc. If at all possible you should have your 360 running wired to your router along with your computer...it can make a difference.