What about the xbmc Linux distro? Also can you elaborate on external hdd comparability???
There shouldn't be any external hard drive compatibility issues, just keep in mind that you'll be limited to the transfer rate of the USb cable. Since you're just streaming stuff and you'll be running the OS off the SD card (which is the Pi's only source of storage, other than drives connected via USB or another extension), that shouldn't be a problem. Just make sure that you have a high-quality SD card (most say class 10 or higher), and not a crappy one.
XBMC is just a piece of software designed specifically for media hosting, streaming, et cetera. It's well developed, it's reliable, and does pretty much all you need. Regarding the distros: if you're looking for a complete OS, the Debian variant (Raspbian or Soft-Float Wheezy) will generally be the better choice in my opinion, unless you specifically want to play around with Fedora, ArchLinux, Android, whatever.
Something you may opt for is OpenELEC, a Debian distro that's made solely for a media center. It comes with XBMC already installed/configured, and sacrifices the ability to do anything else (i.e. install other programs) in exchange for being
really lightweight compared to a full OS. Since you'll be loading your OS's on SD cards and your data on external hard drives, you can install different OS's onto several SD cards and swap them when you want to use the Pi for something else. So, you could install OpenELEC on an SD card and use that with the Pi for the most part, and when you occasionally want to use it for something else you can have Debian or whatever installed on another SD card, all configured. That's all up to you.