A report from Engadget today has revealed that Apple might be working on the next Apple TV, built with iPhone OS, and it will only cost $99 when it is released. If their sources are accurate, the device would more closely resemble “an iPhone without a screen.”

Apple TV

It would carry the guts of a next gen iPhone, meaning the A4 processor, 16GB of internal storage, and iPhone OS. They also say it will be much smaller than the current generation and have only a couple plugs on the back. The new Apple TV would also be capable of 1080p HD video which is much nicer than the 720p video the current generation is limited to.

With the reduction in size comes a drastic change in the way Apple will be approaching the device. Instead of relying on local storage, they will focus on streaming content by using an upcoming iTunes cloud service. The report also claims there might be support for Apple’s Time Capsule device, giving you the ability to use local storage on your own network. The focus will be on streaming, so the Time Capsule would be completely optional, but they should still allow you to connect to computers on your network.

It will apparently use iPhone OS, which means they could decide to make use of the App Store and allow third party applications to run directly to the TV. If they were to support this it would make the new Apple TV a great competitor for the upcoming Google TV which can run Android applications. The rumor lacks any details of this ability, so it might be that the iPhone OS is just being used to leverage the new hardware changes and won’t have an App Store.

The report also states that they do not plan to announce the new product at next month’s WWDC event, and there is no word on when the product will be ready to be released. However, they say that Apple is working “full steam ahead” on the next Apple TV, so hopefully it won’t be too far away. With Google TV being announced recently and now this rumor today, the TV market space is about to get a lot more interesting.