Personally I've been ripping the kids DVD's and converting them to Apple TV format. Your not going to get a truly HD cinematic experience with the ATV, but its great for the kids movies or any movies you might want to put on there. They just pick a movie and watch.
Same here -- much easier to load everything onto the ATV rather than fumble around with scratched DVDs. The kid content from iTunes is just ok, not great, but you can fill up your ATV with all of the DVDs you have sitting in a drawer getting scratched.