I'm pretty certain AppleTV does one of the following with audio:
converts a known supported codec (WAV/AIFF/AAC/MP3 etc), to PCM to output via the optical digital link
in some circumstances outputs a 'raw bitstream' which an AV amp will recognise as either Dolby Digital (2 or 5.1 channel) or DTS
Yes I saw the same blog post you linked to after my post. Basically it works by adding an AC3 (5.1) track to an MPEG4 H.264 file by storing it as a WAV (which is raw lossless copy of the AC3). This is a very unusual combination (an MPEG4 video with a WAV soundtrack) but according to this blog it does work.
However it has the big drawback in that it will only work if output via optical to an AV receiver. You cannot use it with analogue speakers etc. you will then just get a screech since they cannot understand the AC3 coding contained in the WAV.
Whereas my suggestion of using Front Row 2 on a Mac with VIDEO_TS folder would work in all situations (analogue and digital).
Obviously what is really needed is for Apple to fix QuickTime which is looking increasingly embarrassing.
PS. The blogs suggestion while very very clever
still does not let you use subtitles, or multiple audio tracks.
PPS. Yes, you can permanently burn in the subtitles in to the video image using SubMerge, but a) you would be limited to a single language, and b) we want to be able to turn them off and on just like a DVD, remember the TV is supposed to be the DVD Player for the Internet age.