How To: Taxonomy Term with default to show all values

It seems I struggle with things for hours and right after I post an issue I get it working. I had an extra argument in my view, I think that was the problem. After getting my titles right, I plan to post a tutorial on this.

To clarify what my goal was:
I wanted to create (and did) a view of limited number of video thumbnails in the panel with a "more" link going to the full pageable view. The taxonomy selection is carried over from the panel to the view. The taxonomy term is selectable only in the panel (you could set up a separate taxonomy block to stay in the view and switch terms).

This only works displaying a single-level taxonomy, which is adequate for most applications. If you need a multi hierarchy look at http://drupal.org/node/75626. I am using Panels 2 and the latest version of Views for 5.x. I also installed the Taxonomy Redirect module which allows you to redirect taxonomy/term/nnn to something like video/nnn where nnn is the term id and video is the panel url. This is optional to force redirection to the video panel page when someone clicks on a taxonomy term link shown on a node.

1. created a view with a taxonomy term argument.
-- I selected both page and block in the view. For the page, I used a pager and in the block I used the more link. The URL for the page does not contain /$arg at the end (I had that in there and the default did not show when I did). I have not tried it with the $arg in the middle of the URL.
-- In the default field of the taxonomy argument in the view I selected "Display All Values". In the URL for the page view I did not In the title field of the argument, I entered Videos: %1. The %1 provides the taxonomy term name substitution in the title when navigating to the view's URL.
2. I created a panel view (admin/panels/views, requires Views panes sub-module to be activated). I gave it a name and title, selected Block as the Type, Taxonomy Term as the required context, "from panel argument" as the Argument Source, First as the panel argument, All other options default.
3. I created a panel with the url of video
4. In the Panel Context I added an Taxonomy Term Id argument in the Arguments section. For Default, I selected Ignore it, I put Videos: %term in the title, selected Argument type: Term Id, and chose the appropriate vocabulary by selecting the checkbox. I also used Use Different Default Display which gives me the ability to customize the default (no term specified) page. I did not need to use the Own Display options for the different content types.
5. In the Panel Content I added the pane to the Default panel, using the Panel View I created above (shows up under Views in the selection box). Also added the same thing to the Taxonomy Term1 Default panel. There are two panels in one effectively when you create the taxonomy term argument as I did.
6. In the Layout Settings of the panel, I set the title on the default panel to Videos and on the Taxonomy Term 1 Default panel I set the title to Videos: %term
7. I created a block entitled "Video Channels", making it only visible for video and video/* urls (could be a custom pane in the panel if this works better for your design layout) with the following code, ripped from http://drupal.org/node/88089 (2nd snippet) with slight modifications: changed url and added weight sorting. http://drupal.org/node/21867 provides lots of variations.

<p><span id="video-channel-listing"> <?php
/**
* Creates a list of taxonomy terms for video channels in weight and  then alphabetical order.
* Each term links to the corresponding url with term id
*/

$query = "SELECT tid, name from {term_data} WHERE vid = 16 ORDER BY weight ASC, name ASC";
$result = db_query($query);
while ($term = db_fetch_object($result)) {
  $items[]= l($term->name, "video/$term->tid");
}
if(count($items)) {
  return theme('item_list',$items);
}
?> </span></p>

Make sure you select the PHP input filter when creating this block or pane.
8. In admin/build/taxonomy_redirect, I configured the Taxonomy term redirect for the video channels vocabulary to point to video/!tid

I hope this is enough detail.

Yes, the default does work. It shows all values in the view pane in the panel. In the View (not panel view, the actual View), in the argument definition, you must specify "Display All Values" in the default field. It should work for you then