File compatibility questions

I just picked up and ATV2 and I'm pretty impressed apart from the awful level of file compatibility.

Here are a few examples. I took an AVI file, loaded in QT7 and saved so it's a MOV file. QT says it's a generic MP4 video with MP3 audio, pretty low bitrate. It plays fine in iTunes but won't even appear in the playlist on the ATV.

At the other end of the quality scale I have a h264 720p file with DTS 5.1 and that appears in the ATV list and even displays a still from the movie but that won't play either.

This is very disappointing.

Anyway, enough venting. My question is, does anyone think these files will ever be compatible? I'd hate to spend hours re-encoding and throwing quality out of the window just for Apple to release a firmware update and enable playback.

Is it worthwhile to jailbreak the ATV2? Would that allow playback?

Also, I see iTunes has an option to make a file that is compatible but I can't find any details on exactly what file it will make, is it worth it to just let iTunes go at it or will I get better results doing this myself in Handbrake?

Thanks!