Spiros, Thank you!
Well, the AppleTV and the iTunes concept is a very "closed system" which is good on a way since its always in sync and for me, using a Mac and iPods and Iphone its easy to use and pick and choose what to sync and to which device.
BUT, as you already have figured out, If you want to play other formats and sync it onto your aTV you have to convert the files to a proper iTunes/Quicktime format like .mov or .m4v. To do that, I prefer using an excellent free software called Handbrake (www.handbrake.fr) which also can rip DVDs into Apple TV and/or iPod formats. As I also make promotion videos in AVCDHD format, and I convert them with VoltaicHD from Shedworx (http://www.shedworx.com/voltaichd) which is fast and gives a brilliant result
However, since you now have installed aTV flash, you can actually play movies in other formats too ( .avi, AVCHD, and raw copies of DVDs. etc.) but you can not sync it through iTunes. Instead you have to keep them on another harddrive (ethernet or usb) and stream them from there. Use the NitoTV that comes with aTV flash go to the "Network" menu to set up and connection to a network sharepoint.
Lots of interesting tips and tricks with aTV can be found here also: http://forum.atvflash.com/index.php
Good luck!
Peter