i don't understand all these people who argue against better hardware... i.e 720 is good enough, the processor does just fine, etc,
go look at anything else in the apple line that was released three years ago - laptop, desktop, original iphone, ipods, etc... now say that your upset that they were all updated with something newer, better, faster, etc.
Of course better hardware is to be expected with the apple TV
I don't think people are arguing against hardware upgrades per se, it's just that as you begin to add all of these requested hardware features the price is going to increase and we're not certain that this would be good for the majority of users. Most people will have no way to get 1080p content into their Apple TV and the storage and streaming requirements are pretty huge for moderately compressed 1080p video. This means that you'll either need a very large hard drive in the Apple TV or a directly connected (probably over wired ethernet) media server to hold any significant amount of full-resolution HD content. Moreover, today's internet isn't ready for high-quality 1080p streaming as a daily thing.
Also, Apple can't invest in a radically redesigned Apple TV with high-end features when the content providers could decide at almost any moment to end iTunes HD rentals and purchases. In fact, I'd say that this is probably the biggest obstacle to having support for higher resolution content on the Apple TV (the content providers don't want to do it).
However, there are a couple of things I would like to add to the Apple TV feature set. First, they should be able to support 30fps 720p content with only a minor upgrade to the existing hardware (it might even be possible to do this with only a software update).
Next, I would really like support to be added for streaming content from a hard drive attached to an Airport Extreme (or from a Time Capsule, etc.). What I mean is that I don't want to leave iTunes running on my Mac in order to stream content from a networked hard drive. Another option would be to enable the USB port on the Apple TV to work with external storage (for the life of me I don't understand why this latter hasn't already been done).
Beyond this, I'd like a little more performance in the GUI and general improvements in stability. Better performance might need new hardware, but I suspect a lot could be done in just software tweaks.
Then we have the possibility of limited support for the iTunes App Store. I use to think that this would be the "killer" feature for the Apple TV but now I'm thinking that it would be pretty complex and difficult to achieve and I'm not certain that Apple wants to make any more "waves" in the current iPhone/iPod ecosystem (i.e. the monetary return would not be worth the investment). Now, an Apple tablet would be a different matter, so I do see the App Store expanding on that type of device.