OK after posting that and doing more research I've found a lot more discussion about the same issue (or very similar - a lot of people are running into the same thing with DVD playback and I don't have a DVD drive in my HTPC box, but I assume it's the same problem), but even though people have been talking about it for 2.5 years I don't see a real solution.
For the sake of anyone else on the same path I'll post some links to other threads and the proposed solutions that look promising. I can't test some of these at the moment because I'm away from my system, but it seems like "solutions" are either ugly or not working for everyone, and that this is simply a bug in WMC that MSFT has failed to address despite years of complaints...
Threads:technet: Problem playing DVD’s within Windows Media CenterGreenButton: Problem playing DVD’s within Windows Media CenterGood old Avsforum: Video Error Files needed to display video are not installed or not workingAnd that thread links to another GreenButton thread with a new (to me) proposal at the end:
Note that all of these threads have *a lot* of proposed solutions that (to me, anyway) seem errant or pointless, like adding/removing more codecs, rolling back W7 updates, or messing with your video drivers. It seems pretty clear to me that my system can handle the files/codecs involved but that 7MC chokes in certain playback scenarios. I'm less clear on exactly what those scenarios are, but here's my stab at it: when (A) HDMI exclusive mode is on, and (B) 7MC thinks it is trying to juggle more than one audio stream, either overlapping or very close together ... like playing its own internal navigation sounds, or playing one Recorded TV file and then another, or changing from one channel to another in Live TV. I believe (but haven't tested thoroughly) that in all cases WMP can play the files involved, but 7MC (sometimes) fails.
I'm going to list the proposed solutions I'm seeing that make some sense to me (even if they're gross), and I'll report back with what works or doesn't for my system. I would be interested to hear if someone can say "that's an idiotic idea, don't bother" or "that will likely solve your problem but cause another", etc...
[Where I can I'll post links to individual posts so that this post doesn't get crazy long]
Lots of sources/threads propose:
--Turn off navigation sounds in 7MC. [I've done this and it helps, but doesn't completely fix]
--Turn off Animation in 7MC [I don't think I've done this yet]
--Set your HDMI output in Windows to 2-channel stereo, but leave WMC speaker config to 5.1 [I think the claim is that actual output will still be 5.1, but this seems disgusting and I can't believe it won't break something else - I'll try it anyway though]AVSForum: delete PlayReady contents and reinstall 7MCGreenButton thread (8th post):
To rebuild the string tables, on the computer that displayed the message, at the command prompt, type Lodctr /rAVSForum: toggle 16/24bit sound
Sorry this has gotten so long, but I thought it might help to get everything I could find in one place. I'll try the different proposals and report back. If anyone has other suggestions, fire away...