Yes you can use it as an extender. It works with Divx, xvid, mp4 (up to 4 gig in size only), and wmv. It can't handle the MKV container, so you'd need to demux to mp4, noting the size restriction for mp4) or convert to another format. However not all these formats play within the media-extender platform, some have to be played straight from the dashboard, not much of a killer as the MCE interface is quite clunky anyway. There is a wireless adaptor, but its only 54mbps, so once you knock off the overheads for wireless (40-50% of bandwidth) you're not left with a great deal of bandwidth, so it will probably work fine with music and Standard Def films, 720p may just about work on wireless, and 1080i and above won't. So I'd advise 200mbps homeplugs or a standard wired ethernet connection.
Oh, and its noisy. There are lot of threads recently about that.