I don't know about the original ATV, but the ATV2 you can obviously stream from iTunes (not a huge deal to transcode files into m4v), if you have an iPhone 4 or an iPad 2 and have AirVideo, you can use a little trick to be able to play pretty much any video on your system on the ATV2 without manual transcoding (requires the use of the AirVideo server, you basically have it transcode on the fly and have your device then stream it to the ATV2).
The last option is jailbreaking which does work and usually won't brick your device. Usually if a device becomes non-responsive due to an apple OTA update you can do a restore through iTunes to get it back to stock firmware. One would think - Oh cool, this will work great - well, I have a jailbroken ATV2 w/ XBMC installed. It works OK, but not great. There are a lot of files I have that it can't handle or autocrashes XBMC back to the ATV2 menu (AVI's that are too large, MKVs with certain H.264 encoded video files can cause grief, etc.).
Your best bet (for video compatibility) is to either transcode (Handbrake has ATV2 presets, or you can use MPEGStreamClip) or if you have an iOS device look into the Air Video trick.