does your computer have to be on for this to work?
Yes. The videos have to be stored somewhere
.
There is a PC or Mac server component that also has to be running on the computer that has the video files. This software is on their website for download. With the server component, you specify which directories (whether local to the machine, or on a mounted drive) you want to be shared to the iPhone.
On the iPhone you just need the application to see the directories.
I tried it both locally (in my house wifi for both server and iPhone) and then running the iPhone connection via a 3G connection, and my Mac via a Verizon FIOS connection, and to be honest, I couldn't tell a difference in video quality, nor did the software ask me to change it (as mentioned above). YMMV.
I'm pretty impressed with it, no regrets at all on the purchase.