I have the same problem. Unfortunately once you have modified the
movies with 1.2.3 for hacked ATV1 there's no way to undo that
modification so that the videos will work on ATV2. It would be nice if
1.4.0/1.4.1 had a function that removed the modification so that the
videos can be encoded properly for ATV2, but it doesn't. Instead
you'll probably have to redownload/rerip all of those video files and
start again with 1.4.0/
1.4.1.
I don't remember seeing a disclaimer in 1.2.3 (and previous) stating
that the hacking modification was irreversible, even with future
versions of iflicks.