I love my ATVs. I have two ATV2's, neither are jailbroken. (which I'm sure some people will find to be a waste, but I just don't need it) One connected to the bedroom TV, the other to the main living room TV. The bedroom is connected via wireless (Apple Airport Extreme, about a year old, 802.11n, decent reception but not full strength), and the living room ATV is hard wired on a gigabit network.
I stream Netflix and mirror iOS devices frequently. It's great to pull up photos, music, and youtube videos on my iPhone/Ipad, and then shoot them over to the big screen so everyone can see without crowding around.
I also have a large library of videos I've collected. I have converted a large part of my 700+ title DVD and Bluray library into ATV's M4V format via Handbrake. I don't purchase ANYTHING from iTunes directly. (Music I buy from Amazon so it's normal MP3 format for best compatibility with EVERYTHING, and no DRM whatsoever) Start small (new movies only, as you get them?) and keep adding to it! Eventually you'll have a large collection to tap into at any time! It's daunting, but you have to start someehere. Start by ripping and converting your new purchases, and when you reach for an older title, toss that onto the computer and convert it, too. Over time, things really add up.
For quick and dirty videos that are gathered from various sources, that I don't intend to keep, I use Air Video Server running on both my Mac and my PC to stream the temporary vids over to the ATV. Works great. Anything that I'm going to want to keep long term then gets converted via Handbrake and added to the rest of the collection.
I serve everything up from a 2008 iMac that lives in my office, which has two 2 TB USB hard drives hanging off it. (Cheap Western Digital Elements drive, normal PC ones just reformatted for macs) I have a full copy of the entire collection on each drive, which I update manually, here and there, as a backup from a dying hard drive. Not offsite, and won't protect me from a fire or anything, but at least I have some protection. USB2 on a plain external hard drive is plenty fast enough. The 720p videos look fantastic, even blown up big on my 65" Plasma main TV. Not as crisp as Blu-ray, of course, but eminently watchable nonetheless. Besides for SERIOUS critical viewing, I'll be going to the Blu-ray source anyway, not watching via ATV. The ATV is for casual viewing, music, photos, etc.
I rip on my PC (faster than my Mac) using DVD Fab (free), Handbrake (free), and MetaX (I paid $10, used to be free, I just like it better than Subler) and then shoot the finished files over to my Mac's external drive, and then drop onto iTunes (set to reference the location of the file, not copy to internal HDD of course) and it's live.
Sounds a lot more complicated than it is. Adding new titles is several steps, but they're all quick and easy, and you walk away between steps. I'm not in a hurry, else I'll just watch the actual Disc, or stream via Air Video instead. Long term additions have no rush. And I have a LARGE collection of movies and TV shows to choose from within seconds, at any time, on either or both screens.
I understand the complaints about not being able to natively support some alternate file formats, but frankly, given my setup, which is not overly expensive or overly complicated, and which is braindead simple from a viewing standpoint, this has caused me genuine annoyance maybe 2-3 times in the ~5 years I've been enjoying ATVs. (I was an early adopter starting with the ATV1)