Well my old media player just died (an Xbox 360 now with the ring of death), and I need a new one.

I'm considering the aTV, however much of my content is in Xvid format. So is it able to play those?

And I notice it has a USB2.0 port, so can I plug my external HDD and have it read that (and hence allow me to buy the 40GB model?

You cannot do either of the above without "hacking" the AppleTV, but it's apparently not hard to do so. Do a google search on the topic, plenty of information on this.

have a look at this thread

Save your money. Get am Mvix media centre instead. If you love your video, it's hard to bet for value and flexibility, short of building your own baby HTPC.

I had similar concerns before I got my AppleTV, and when I got mine, I was very tempted to install the patch to enable DivX and external HDD support, but in reality, I haven't found a need to - I can easily convert AVIs to MP4 for my AppleTV using iSquint for free, and I can easily have my iTunes library hosted on an external HDD via wifi, which can be streamed to the AppleTV wirelessly. The ability to hire movies online, initially from the US store, but now in the Australian store, is the main reason I got the AppleTV, and that works well.