Engadget received a tip detailing the new device and has confirmed this information with a source very close to Apple.
The project has been in the works for quite some time and will see the AppleTV implement a very similar architecture to the iPhone 4. The device will be based on the A4 processor and only have 16GB of flash storage. It will be capable of 1080p HD and be very small in size with only two ports, power and video out. The price point is expected to be $99.
The device streams from the cloud; however, there will be the ability to use the Time Capsule as an external storage component.
No word yet on whether the AppleTV will let you download and install applications from the App Store; though that can't be far off.
Apple won't deliver the ATV news at the upcoming WWDC -- that event will be focused on the capabilities of the new iPhone -- but development on the product is most definitely full steam ahead.