40gb vs 160gb - creating a video library on external hard drive

I'm considering buying an Apple TV and want to make sure it accomplishes what I want before I do. If so, I'm wondering if I should buy a 40gb version or the 160gb.
Ultimately, what I'd like to do is put my entire video library onto an external hard drive. I don't want to deal with physical DVDs any longer. I know how to convert my home movie DVDs and get them into iTunes so that isn't an issue (although I know it'll take time).
I currently have 1 iTunes library that I connect to with my iMac and my MacBook Pro. The library is on an external hard drive. Can I connect an AppleTV to this external harddrive where the existing iTunes library is?
If this is possible, is the larger 160gb hard drive necessary? My thought is if I keep my iTunes library on an external harddrive, I wouldn't need the larger capacity AppleTV?
I appreciate input from others that may have done this. Thanks!

Can I connect an AppleTV to this external harddrive where the existing iTunes library is?
No. Your TV device is connected either via your wireless 802.11 a/b/g/n network or via your 10/100 base-T wired network. As long as the TV can communicate with iTunes and iTunes knows where your library is located, the data will be sent to the device for viewing. I currently am using a 1 TB LaCie drive for my iTunes library but as I have almost reached full capacity for just my standard definition files, will be switching to a 2 TB as soon as it arrives. The only advantage for having a large internal TV drive is that you can watch your movies with your computer/iTunes turned off. Since my computer is on all day anyway working to convert my video library for use with Front Row/iTunes management of iPhone/iPod/TV files, I have no problem viewing my content exclusively in the "streaming" mode.

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