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Would it be possible to use an external drive with it or say a NAS drive purely with the apple tv (i.e. no computer involved)?

You'll always need a computer with iTunes to sync or stream to it.

You could also use a 750 gig drive for it, so long as you could fabricate or buy a 2.5" PATA to 3.5" PATA cable and run it out of the ATV to the 3.5" drive in another enclosure. This is what really annoys me about Apple: why didn't they put a SATA drive in there? Life would be so much nicer.
 
You'll always need a computer with iTunes to sync or stream to it.

You could also use a 750 gig drive for it, so long as you could fabricate or buy a 2.5" PATA to 3.5" PATA cable and run it out of the ATV to the 3.5" drive in another enclosure. This is what really annoys me about Apple: why didn't they put a SATA drive in there? Life would be so much nicer.

When the upgrade comes out, I won't need a PC with it because it will be used for Movie Rentals and Buying TV Shows etc over WiFi. Also, my plan is to sync my iTunes/Apple TV every so often so that it won't rely on my PC being on.

Also, as someone else pointed out, there would be a problem with creating the partitions which other people have had so i'd rather not change the drive if there's another way around it.
 
Anymore thoughts?
I upgraded a 40 to 160 gb drive without problems. The instructions are on engadgit I think

Basically I took the old drive out of the ATV and connected it to the mac using an external drive case. Then using some command line magic created 3 files which contained images of the 3 existing partitions. these were saved to the mac.

The new drive was now attached to the mac, the original being put away for safe keeping and the 2 or 3 partion images restored to the new drive. The drive was put back to the ATV and that was it. took about an hour I guess.

Easy to do, if you can follow instructions. Try here http://wiki.awkwardtv.org/wiki/Prepare_a_Hard_Drive
 
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