The fact that Air Video, an iPhone app from Matej Knopp at inMethod that allows users to stream video from their home computer to their phone, actually works over Wi-Fi is impressive. The fact that it works as well as it does over 3G is darn near a miracle.

Air Video is available at the App Store for $2.99 for iPhone, iPad and iPod touch. There’s also a free version that allows streaming of limited file types. I downloaded the free version first and was surprised that the service worked as well as it did, which of course prompted me to take the plunge and drop $2.99 on the full version.

I’ll start with a disclaimer: Air Video will not stream DRM-protected video (we can cross our fingers that this feature will be added in the near future). You’re probably not surprised that this includes all video content purchased on iTunes. That said, you can stream just about any other video content (AVI, DivX, MKV and more) from your home or work computer’s hard drive to your iPhone.

I tried playing an 8-minute video that I’d created on my Macbook Pro. The video was large and included a soundtrack layer (big file). Over a Wi-Fi connection, Air Video simultaneously converted and streamed the video with almost no lag time, and once it got rolling, the playback was seamless. There was a little bit of wait time over a strong 3G signal but not much, and again, once we were rolling, it was almost seamless.

On one occasion, I tried streaming a piece of HD video, which was a little large for the weaker 3G connection I was getting. Air Video has planned for this occasion. The app allows users to lower the conversion quality, and that seemed to do the trick.

So how does it work? I was surprised by the simplicity of the app. First you download the Air Video Server to your computer from http://www.inmethod.com/air-video/index.html. After that, the server will connect to your home network via Wi-Fi, and you’ll be asked to add folders that contain media to the server dialogue box. The server software is available for Windows PC and Mac operating systems and is needed to stream and convert video.

After that, you’ll find that the folder you’ve added to the server is now visible within the app on your iPhone. From there, simply select the video you’d like to watch and enjoy.

If you’re looking to stream over the Internet, inMethod suggests that your router should support UPnP or NAT-PMP protocols so that Air Video can automatically set up the port forwarding. If not, you can configure the port forwarding manually, but that gets a little hairy if you don’t know what you’re doing. If you want to store video to the device, Air Video can covert the file to an iPhone-friendly format.

Air Video is the way streaming video to the mobile device should work. The app is a testament to the power of the cloud. As streaming over the network becomes more commonplace, users are going to expect the video they get on their phones to look like the video they see on their television sets, especially if they’re paying for it.