I found the following very helpful, as I have too many videos to keep it on my internal hard drive. So what I wanted to accomplish was to keep all my videos on an external drive, but still be able to watch them through my AppleTV.

The problem is that AppleTV can only read files through iTunes (or by making a physical hack to your AppleTV). I came up with a very simple solution. First, I made sure all of my videos were on the external drive. Then, in the Finder, I went to that drive, selected all the videos, held down Command and Option, and drag and dropped them onto iTunes. Even if iTunes doesn't show you the little arrow indicating that it is going to make a shortcut to those files, it will do so.

After doing this, iTunes and AppleTV will want to sync. Cancel the sync, and then go to your movies in iTunes and uncheck them -- this way, you will be sure iTunes won't try to sync them again.

In your AppleTV, go to Sources and find your computer. (I assume your are trying to read the files from the same computer you use to synchronize to AppleTV. If not, you have to have previously authorized it to use with AppleTV.) Now you will see there all of your media. I am using an Apple AirPort (the one with the UFO form factor) in an 802.11g network, and it works great to stream videos from my external drive through iTunes.

[robg adds: I haven't tested this one, and there may be other ways of accomplishing this trick -- and now that I know how to get my AppleTV working properly with my router, I will be testing this later.]