Didn’t think it was possible or this easy but turns out for just $70 you can install an HD decoder into your Apple TV that will allow you to playback 720p and 1080p videos using XBMC on your Apple TV. Here are some links:

bluefish.net.nz/2010/02/apple-tv-and-full-1080p-broadcom-card.html
and
rufn.it/aTV/

Also here is a link for the HD adapters on eBay [Link]

For more information just google: Broadcom Crystal HD Apple TV