So I successfully updated both my iPhone 4 and my Apple TV. I tested out airplay with 4.2 on my iPhone 4 and with iTunes. Can airplay video from both. But there are some odd omissions/bugs:
1. When airplaying video from iphone 4: All videos in the iPod App, videos section, can be airplayed with no problem. However, for videos in the "photos" app (ie: videos you've recently taken with your iPhone camera), there is simply no airplay button. The still photos have an airplay button, and can be airplayed to your ATV with no problem. But the videos cannot. This is odd and disappointing for me, because this was the feature I was most excited about: Taking a video of my 7-month-old son with my iPhone 4 at one point during the day, then airplaying it to the ATV to show my wife and others later in the day, without having to bother to synch my iphone to my computer, put the video into iTunes, and navigate to it on the ATV.
2. iPhoto videos: The recent iTunes and ATV2 updates supposedly enable you to see the videos that are in your mac's iphoto library when you go to the photos section of your homeshared computer on the ATV2. Well, the videos are now visible amongst your photos in the appropriate events on the ATV2 (whereas they weren't before), but when I try to play the video on the ATV2 it starts to buffer, starts to play, and then immediately stops and I get a "there was en error loading this content". In a couple cases it made the apple tv reboot. I guess there is a bug either in iPhoto, iTunes, or the latest ATV2 update. The functionality is clearly built in now, but it doesn't work.