Apple TV Upgrades: Xvid (And More) Support, 120GB HD
A Somethingawful.com forum post details how to play Xvid and other non-supported formats on the Apple TV.
The process essentially involves the addition of the Perian plug-in into the /Library/Quicktime/ directory of the Apple TV's hard drive. Perian is a "a free, open source QuickTime component that adds native support for many popular video formats".
This confirms that the Apple TV is essentially running a version of Mac OS X. The process does require disassembly of the Apple TV unit to access the hard drive, but should pave the way for easier tutorials.
Meanwhile, Gizmodo posts a success story of upgrading the Apple TV's hard drive to a 120GB drive.