Well that didn't take long at all. Someone on the something awful forums was able to get his Apple TV to play videos in various encoding formats by adding codec support with Perian (a codec pack for QuickTime). Apple TV essentially runs a stripped down version of OS X. As we all know, Apple TV also runs a modified variant of Front Row, which utilizes QuickTime. By adding codecs to QuickTime with Perian you effectively allow the Apple TV to recognize and play any video file that Perian supports.
The forum thread goes over in detail what was required for the hack and overall, I was surprised that it was so easy. In a nutshell, you need to open up the Apple TV, take out the hard drive and plug it into your computer. That is most easily done with an external USB enclosure for 2.5-inch hard drives which can be found at Newegg inexpensively.
Once you can access the Apple TV hard drive on your computer (probably Mac-only since Perian is only offered in dmg format), drag over the Perian codecs to the QuickTime folder then install an FTP client and open up some firewall ports for further tinkering.
I have always been in the mindset that I have no use for an Apple TV, but with the newfound capabilities I might be convinced. 300 for a OS X media device with HDMI/component outputs and WiFi - not bad at all. Oh and if you think that 40GB of storage is nowhere near enough, the hard drive can be upgraded. According to the Perian wiki the following types of video encoding can be played: MS-MPEG4 v1, MS-MPEG4 v2, MS-MPEG4 v3, DivX 3.11 alpha, DivX, XviD, 3ivX, MPEG4 video, H.264, Sorenson H.263, Flash Screen Video and Truemotion VP6.
If you're adamant about following along with this hack, pick up your Apple TV today since there is a possibility that Apple might "fix" this very soon.