Heh, I'm at my folks' place now and I was going to test this for you, but I guess it wouldn't have helped you anyway.

What you're describing is a common annoyance I have with the Apple TV. It's very hard to make a video file that is compatible with it. I even purchased Quicktime Pro and was unable to correctly encode a video that would play on the Apple TV.

That said, I love the device and I really want one of my own. At last count, I've tried about seven different ways to get computer content onto the TV, and none of them have come more than a distant second to the Apple TV. I'm planning to buy one used, upgrade the drive, and enable Divx/Xvid/MKV playback. Then it would be perfect.