I just got mine the day the Take 2 was announced. I love it! You can watch all of your current DVDs on it, but of course you'll have to encode them as mp4 first and then put them in your iTunes library. The process is a bit labor intensive, but the results are great. And if you are like me (and probably most Apple TV fans), you'll want to tag your mp4 files with nice cover art, synopses, etc.
The other night I had a few friends over to watch a movie. While we all sat around and ate dinner first, we watched funny youtube videos. That alone made the Apple TV worth it for me.
Edit: I re-read your post and I'm not sure I provided you with a clear answer. To watch movies you can either buy/rent from iTMS or you can rip/encode your own DVDs. There are several ways to do this, but the vast majority of users rely on Handbrake (just use the Apple TV preset), a freely available mp4 encoder. Some also use Mac the Ripper to rip the DVD to the hard drive first. Once the file is encoded, I use MetaX to handle the metadata tagging. Then I send the file to iTunes and sync it with my Apple TV. You can also stream your movies from your computer or an attached drive to the Apple TV. I sync some of my movies and stream the rest. I have not experienced any hiccups either way over my g network.
The Apple TV is a fantastic device, and I really hope that the Take 2 software and the new rental scheme makes it more popular than it has been.