From Wikipedia....
"The First Generation PureVideo HD
Starting with the release of the GeForce 6600, PureVideo added hardware acceleration for VC-1 and H.264 video, though the level of acceleration is limited when benchmarked side by side with MPEG-2 video. VPE (and PureVideo) offloads the entire MPEG-2 pipeline (except the initial run length decoding, variable length decoding, and inverse transform),[2] whereas first-generation PureVideo offered limited VC-1 assistance (motion-compensation)."
So VP1 (PureVideo v 1) has basic support for H.264 and VC-1 (as well as full support for MPEG2 decoding). It wasn't till VP2 that PureVideo was able to support full Blu Ray spec decoding. Thus could be the limitation in Apple TV's decoding i.e no CALBAC entropy encoding and max resolution 720p. Which makes me think that they are unloading some of it on the GPU, even if it is limited.
Being able to access the PureVideo technology requires only a software update (again if not supported already)... would not create a huge cost to Apple - just as with my Mac Book... came with with 10.5, which had good ole Quicktime - which had no support for PureVideo decoding with my GeForce 9400M... along come 10.6 with Quicktime X and boom support for PureVideo decoding... off loading the playback of H.264 video to the GPU (plus saving battery life when out and about). I just wish Apple would share this info. I.E if they are a using a substandard Video Scaler , then I would scale my videos with something better before encoding them.