AppleTV Audio Spec:
•HE-AAC (V1), AAC (16 to 320 Kbps), protected AAC (from iTunes Store), MP3 (16 to 320 Kbps), MP3 VBR, Audible (formats 2, 3, and 4), Apple Lossless, AIFF, and WAV; Dolby Digital 5.1 surround sound pass-through
1) I remember reading DivX and Xvid don't work, so if the DVD was ripped it might not work.
2) Setting Audio:
Get to main menu>Settings>Audio&Video
In Audio&Video there are two place you can play with: Dobly Digital and Audio Out. The default I think is auto, but i guess you can play. Let us know what happens.
Hope you didn't get "Ripped Off",