What all can Apple TV do?

I have a 20" iMac and use it to watch downloaded videos of TV shows since I live in South Korea and can't get most like Smallville and such locally. They are usually in .avi, but sometimes quicktime. I was told by a guy that I could just get Apple TV and watch them all on my TV that way through HDMI. That sounded desirable.
I don't think I'll do much downloading from iTunes, but I like the potential. I'm not sure what the hard drive is for other than downloading files. Would I use it for watching the downloaded TV shows I get from VUZE or would those just be sent wirelessly to the Apple TV so I can then send them out to the TV?
Not sure why I'd need up to a 250G hard drive in this if I have 2 Terrabites available outside of this unit (1 TC and one external hard drive).
Is it going to be able to watch .avi files or will I have to convert them to something Apple TV can recognize? I read one thread that had some problem like this, but not sure if it's different than what I'd be using it for.

I have a simple question.
I just bought the Apple TV ~ 160 gig.
I want to store all my movies there (mp4)
Is it possible to keep them stored in Apple TV or do i need to keep them in my computer harddrive too?
If so what is the difference between 40 gig and 160 gig if i cannot store anything there?
Cheers ^^

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