In reply to An Triubhas:
XBMC is the way to go! Oddly, for software called XBox Media Centre, the XBox is no longer natively supported by the main project... BUT there is a project at www.xbmc4xbox.org.uk to keep XBox support alive.
Once you've installed XBMC, you'll need to install some extra add-ons & repositories (Icefilm and NAVI-X recommended) for a better, wider choice but it's all quite simple and there are loads of how-to's on the wiki and YouTube.
I'm waiting for a Raspberry Pi to be delivered to use as a cheap, portable Media Centre... If you have too many problems with the XBox you could try the same, probably the cheapest & smallest way to do it. You'd need the Pi, an SD card (4GB min), a 2A micro USB power adapter, HDMI cable (composite video and 3.5mm stereo audio cable are the alternative), remote (I'm going for a Rii Mini i6, but you could use a USB PC keyboard and mouse either wired/wireless) and a case. I'm going to install OpenELEC (free, already has XBMC installed) and hook it up to the internet with Ethernet rather than buy a wireless USB adapter. It'll even do 1080p