Lots of negative comments here from people that obviously haven't tried one...
I have a 1.83Ghz Core 2 Duo "mid 2007" Mac Mini (MacMini2,1) that I've used as my primary XBMC box for nearly two years.
Currently it only has 1GB ram and an 80GB internal drive (video is on an external 640GB USB drive) but it will shortly be upgraded to 4GB ram (3GB usable) and a 2TB internal drive to replace the external drive. (Less cables/boxes/noise)
First of all, it will be MUCH faster than an Apple TV2 in every way, especially user interface which will be nice and snappy, and is capable of running the fancy but "heavy" skins like Aeon Nox that would cause an ATV2 to collapse.
Unless you fit a Crystal HD card you will only get software decoding - I was thinking about getting one but had never really found a need for it, and now that I see support has been dropped in Kodi I won't bother...
Software decoding will play all 720p content perfectly in my experience - I've never come across any 720p content that doesn't play perfectly in XBMC.
XBMC, unlike Quicktime and some other video playback software actually uses both cores to software decode, and is pretty efficient too - on this hardware it will play high bitrate/resolution videos that will stutter badly played in the native Quicktime player, probably because Quicktime doesn't utilise both cores.
1080p is a bit more of a mixed bag - "low bitrate" 1080p - in the order of 15Mbps plays absolutely fine, however full bitrate blu-ray rips (40-45Mbps) will not play without stutter. I haven't experimented to see where the cut-off point is, but it's somewhere between 15 and 40Mbps.
To be fair a lot of low powered hardware decoded XBMC platforms will struggle with full bitrate blu-ray rips too, but usually due to network performance issues when streaming across a network.
Upgrading the processor to 2.33Ghz should significantly improve the performance of 1080p playback and allow you to go to higher bitrates.
So is it high enough spec to play all 1080p perfectly ? No, however it's still a big upgrade from an Apple TV2 - remember the AppleTV 2 is only 720p and can't output 1080p anyway. An AppleTV2 also only has 256MB of ram and a MUCH slower cpu...
Keep in mind that this Mac Mini is DVI - you can output to an HDMI TV in full 1080p using a passive DVI-HDMI adaptor cable but you'll have to use analogue or SPDIF for sound. (Not really an issue if your sound is going to an AV receiver anyway)
The only trouble I've ever really run into is that 1GB of ram is marginal, especially if you try to run torrent clients and so forth in the background. 2GB or more of ram should make a huge difference to the ability to multitask while XBMC is running, hence the ram upgrade that I've finally got around to ordering.
The best Mac OS version to run for media centre purposes on this model is Snow Leopard 10.6.8. Anything later just consumes more resources (Lion requires a minimum of 2GB ram to even install) and introduces some minor compatibility issues. A linux based distro like OpenElec may also work but I haven't tried it.
Even if you decide to use it as a headless server later on (as I may well do) it can still make a good little NAS / MySQL server for the other XBMC devices to connect to - wireless is only abg but it does have Gigabit Ethernet with Jumbo packet support, and is capable of running Mac OS, Windows or Linux.
PS where did you get the 2.33Ghz processor upgrade and how much did it cost ?