Even though it might not be the answer you are hoping for, but with something like "VisualHub" or "Crunch" or I believe Roxio has a new conversion software out there, it's really easy to convert even large collections to a proper AppleTV/iPod selection. This, to me at least, is preferable, as I believe the Apple Entertainment family is only ever expanding, and H.264 is nice for me.
Will there be image quality loss after the converson process? Will the apple tv still output it in an HD resolution?