Heres what I have been doing lately. I have been creating 2-3.5 gig "intermediate" sized videos. They are all 1280x576 if the source is 2.35:1 and I crop to appropriate so it does not look stretched and they contain an AAC Dolby Pro Logic II or Dolby Surround track first for compatibility with almost everything and a second AC3 track with Dolby Digital 5.1 or Dolby Pro Logic if 5.1 isn't possible. All these are encoded from 1080p and I like to keep the bit rate above 2100 usually more. My iPhone 4 plays them fine and it gives my macs internal drives a break on size. I keep the bigger 1080p versions in .mkvs or .m2ts containers on my external for safe keeping depending on if I liked the movie

. I have no idea if the Apple TV will play something with a 2100 bit rate but you can check Apples site or ask around. I find if you down sample the resolution and keep a high bit rate you can get better quality at lower resolutions allot of the time. For example I used to encode 1gig 720p videos before I really started to become a picture quality and cinema Nazi so what I do now is downsample to 960x540p which is the iPhone 4s resolution and the quality looks better....just my experience though..