Removed old Info and updated with below instructions:
Download greepois0n RC6 (Use Google to locate download source, a mod removed the previous links, hint try greenpois0n's website).
Restore Apple TV2 to stock firmware using iTunes.
Follow the instructions given by the greepois0n application (IT IS VERY IMPORTANT TO LEAVE THE USB CABLE PLUGGED IN FOR 40 SECONDS OR MORE ONCE THE APPLICATION SAYS COMPLETE), once jailbreak is complete follow below steps to install XBMC etc.
On first boot go to the greepois0n menu and select Inject Software, this will install the cydia payload, nitoTV and ssh, reboot AppleTV when finished.
Using Linux or Mac Terminal (or for Windows use Putty) ssh into AppleTV to complete some manual steps.
You should probably change the default password first
To Fix Time Zone (Apple TV GUI provides no way to adjust time or time zone)
ln -s /usr/share/zoneinfo/America/Detroit /var/db/timezone/localtime
This site will be useful however check that the file exists in the /usr/share/zoneinfo directory before creating the link.
Check Time is correct
apt-get update && apt-get -y --force-yes install org.xbmc.xbmc-atv2
Storing Media Locally:
You can store media locally, use sftp or winscp to copy media files to /var/mobile/Media/, then simply add a source within XBMC to the same directory, you have approx 6.4gb to fill up with music and videos.
Congratulations your AppleTV should be properly setup and ready to stream media, I've had great experience with this thing and now own multiple ATV2's with more to come, I can run 10 or more of these for the same power consumption as my previous HTPC.
Enable AC3 and DTS Output:
apt-get -y --force-yes remove com.nito.nitotv
Enable Bluetooth Keyboard Support
apt-get install ch.ringwald.keyboard-atv
apt-get install org.tomcool.btstack-ui