When installing an AppleTV system update the aTV Flash software will need to be re-installed using a USB flash drive.
If the flash drive was previously used to install aTV Flash re-format the drive as described here.
When installing AppleTV system updates (E.G. AppleTV 3.0), if iTunes is setup to sync to the external drive you will need to be switch back to the internal drive prior to updating.
Steps to Update
Enable AppleTV updates through Maintenance --> Settings menu.
Update AppleTV software through Settings --> General --> Update Software menu. (After the AppleTV system update aTV Flash will no longer be present on the AppleTV)
Install current version of aTV Flash using a USB flash drive.
Will installing or updating aTV Flash delete my synced media or change my settings?
No. Installing or updating aTV Flash will not affect any of your synced media or settings that are currently on the AppleTV. The standard functionality of the AppleTV will not change one bit.
Can I adjust the installed applications once aTV Flash has been installed?
Yes, you can add or remove applications through the Maintenance > Mange Plugins menu. More information on this feature can be seen here: Manage Plugins
Do I have to reinstall using a USB drive every time there is an update for aTV Flash?
No. In most cases aTV Flash can be updated right on the AppleTV through the Maintenance menu. A USB flash drive is only required for the initial installation and for updating aTV Flash after installing an AppleTV system update.
I am using a USB hard drive as primary storage, how do I update the AppleTV software and update aTV Flash?