The WII can be used to play video files on a TV using the SoftMod Homebrew WIIMC application either from a locally attached HDD, or via SMP connection to a PC over the LAN, however the power of the WII limits those files to Standard definition (up to 720 wide) videos. High Def videos (1280 & 1920 wide) will not play natively and crash the application.
The solution is to utilize VLC to transcode these High Def videos to Standard Definition MPEG-2/AC-3 videos on-the-fly and stream them to the WII. WIIMC can then be set up to play those streams using http. See http://www.wiimc.org/forum/viewtopic.php?f=4&t=405 for that info.
See viewtopic.php?f=14&t=76852&start=0 for the VLC process that creates those streams. In addition it will overlay any subtitles on the streamed videos. Obviously your PC must have sufficient power to perform this decoding on the fly, and your LAN have sufficient bandwidth to carry the stream.
This is now working for me and the transcoded video quality is superior. Enjoy!
PS: to the Moderators..It would be nice if there was a Forum for Guides and Tips rather than having them buried in with all the help me posts.