I am having the same exact problem with my DNS-321. It shows up on my XBOX 360 as an accessible device, shows the media, but when you actually try to play, nothing. It tells you that you have possibly lost connection to the device. One thing I have noticed as well. I am running a Linksys WRT610N and it shows the type of connection based on the light color. So, Blue light=gigabit ethernet device attached and green=10/100 based device connected. On two different WRT610N routers my DNS-321 shows green. My entire network, the XBOX and DNS anyway, are hardwired using CAT6 cabling and nothing seems to work. I have emailed the DLINK tech support, but of course I have received ZERO replies from them concerning this issue. This hard drive is supposed to be XBOX 360 compatible, but is not as far as I can tell.
I have tried everything. Resetting the DNS, re-flashing the firmware, refreshing the media list under UPnP, changing ethernet cable, uprgrading router, etc. The media works with the XBOX since I can easily copy it to a thumb drive and play it from there.
So, DLINK this is your chance to help all of us out and get this working.