The reponses I have read say that if you can play it through the iTunes on your computer than you can play it through the ATV. I have been putting my DVD collection into iTunes just for this reason.
This is almost true. To make it true, if you can play it within iTunes AND it falls within the specs of what the

TV can handle, it will play on

TV. The video file specs are at:
http://www.apple.com/appletv/specs.html
iTunes can play video that

TV can't handle. For example, if you shoot some 1080i/p content with an HD camcorder, you can use iMovie to edit & render it back out as a 1080i/p mp4, and that file will go right into iTunes- and play there- just fine. But

TV will need you to down-convert it to a lower resolution that it can pump from your iTunes database to your HDTV.
Everything SD- like any old SD camcorder video, DVD rips, Laserdisc, old VHS transfers, etc. should easily work out. Just use Handbrake and its AppleTV setting. Apparently, everything shot with iDevice video cameras max out at the

TVs specs as well, so any SD or HD you shoot with an iDevice should be fine too.
Otherwise, anything you have at higher resolutions- HD Camcorder video, BD or HD-DVD rips, etc, will all need to be reformatted down to either 720p30fps or 960 x 540. Again, Handbrake is your friend for down-conversions for higher HD source resolution like 1920 x 1080p/i to the 1280 x 720p or 960 x 540 that

TV can play.
It is a joy to have immediately-available access to all such content on demand. As someone else implied, I've found tremendous utility for years on home-grown content and personal video collections converted for Apple TV, yet I've hardly bought or rented anything from iTunes. Apple TV is a tremendous replacement for physical devices like CD or DVD jukeboxes or players, photo slide projectors or albums, and similar. One never needs to spend a dime at the iTunes store to get a whole lot out of these little boxes- especially if you already have a good collection of video & audio media... and Handbrake... and some storage.