I believe you have to actually add the file via iTunes manually, not just put it in the folder. If you don't add it via iTunes, the library database won't see the file and it won't show up in Front Row. I've just (re) tried this myself to verify.
I have a FamilyGuy episode in my home/Movies/TV Shows/Family Guy/ folder. I opeened it and saved it as a reference file in quicktime (now file extension is *.mov). I imported this in iTunes and edited the info so that it is of type TV Show.
I also have a Family Guy episode on an external drive that is attached in extdrivename/Vides/TV Shows/Family Guy. I opened that file directly in quicktime and saved the reference file to the same directory. I then imported the reference file in iTunes and edited the info so that it is of type tv show.
I quit iTunes (to make sure the database was updated) and started front row. Under TV Shows, I know have a Family Guy folder that shows both episodes, and they both play.
You can't just directly put an avi file in the same folder or have an alias point to a folder with avi files in it. In order for the files to properly show up in front row, you have to be able to see them in the TV Shows portion of iTunes.
Also, transcoding your material will usually result in a loss of quality. If you have a file type that you can't import into iTunes, but can play back in quicktime and you want it to show up, you can open it in Quicktime and then save it as a reference file. The reference file will be small, and will simply tell iTunes to use the appropriate quicktime plugin to play it back. You then import the reference file into iTunes, and the reference file will then look for the source when it is played. You then change the file info/database entry in iTunes for the reference file so that it is type "TV Show".
idk what i need to change for it to be recognized as a tv show.
Your source file can be on an external drive, as long as the reference file was created when the path to the source file was the same. For instance, if you have the show as "ExtDrive/videos/tvshows/FamilyGuy/FGS03E01.avi", the reference file in iTunes knows this.
If you change your folders around on your external drive so its now at "ExtDrive/media/tvshows/FamilyGuy/FGS03E01.avi", then you'll have to make a new reference file and reimport that into iTunes. It may be a bit tedious getting everything done, but its a lot better than transcoding a bunch of videos and losing the quality. However, a stock AppleTV will not make use of external Quicktime plugins, only the codecs that the system is shipped with (which does not include xvid).