Currently I have the following setup:

study:
p4 2.8 dual XP Home PC w/Tversity
buffalo linkstation live NAS device (with xvid and h.264 files)

livingroom:
panasonic plasma 720p/1080i
appleTV (used for h.264 videos)
xbox360 (used for xvid transcoded via tversity)

Everything is connected via ethernet. When playing xvid files that are transcoded, I hate that I can't pause or have xbox 'remember' the last view position like i can with h.264 videos with appletv. also my pc is very busy encoding. I want to get a standalone box with component output that can read the divx/xvid video files off my nas device and out to my tv and can work of ethernet or wifi (prefered ethernet). I was thinking about the buffalo linktheater, but are there any others that I should consider, why?

I ordered a mediagate mg-35 (http://coolpc.com/Mediagate-MG35/M/B000NW922C.htm). It seems to be cheap and do what I need it to. Any reason for me to cancel and change to something else? It seems they won't ship before the 9th so I have some time to change my mind. Looked at some of the others, but not sure if they work without an actual disk inside, with just ethernet connection.

I would strongly recommend one of the Tvix boxes. I use the 4100 model and am very satisfied with it. Even though I myself have a 720p/1080i Pioneer plasma, I am very comfortable knowing that the second I upgrade to a full HD 1080p display, my Tvix box will be there to upscale everything to 1080p.

It can play files off a NAS without the need for an internal HDD, outputs via HDMI/component/composite, reads all sorts of media formats including the mkv container (supported in the recent beta firmware) and h.264, passes through DTS audio to an amplifier via coaxial or toslink. You may also add wi-fi or HDTV tuner as seperate add-ons to the same box.

It is a good-looking box, comes with an easy-to-use remote and the best thing is, it is easily upgradeable via firmware updates to add new features and capabilities.

I suggest you take a look here: Tvixbox.com (http://www.tvixbox.com) for other options from Dvico, the makers of Tvix media streamers.

I have read that Microsoft might be adding xvid/dvix encoding into their next update for Xbox 360....

Unfortunately none of my friends @ Microsoft have neither denied or confirmed this :)