A few weeks ago on Twitter, I asked the lazyweb if they knew of a way of streaming an AVI (or really, any video format that is not directly supported by the video player) to an iPhone for viewing. This was before the iPad, so that was not even a consideration. There were a number of ways to stream H.264 video to the iPhone, but streaming AVI files requires live transcoding to H.264. I could not find a solution to that problem.
A week later, on MacBreak Weekly (episode 187), someone highlighted an iPhone app and corresponding desktop application that did exactly what I was looking for. Air Video is an application that runs on your iPhone (since then, they have released a really nice iPad client, too). This connects to a server running on your desktop machine — Mac or Windows. You point the server at a directory of video files of any format it understands. From the iPhone or iPad, you can navigate through the shared video folders, select a video file, and have it stream almost instantly (it takes about 5-10 seconds to initially buffer) to wherever you are in the house. It was exactly the solution I had imagined, yet I could not find it in searches through Google, iTunes, or an number of Mac-specific software sites.
The free version of the client has limitations — I believe you can only browse a limited number of items on the server and/or the video duration is limited — but (for me) it is totally worth the purchase price.