I've alluded to this in prior posts:
What Apple should do with appleTV is NOT integrate it into an HDTV set as an "all-in-one", nor tie it into the tablet (having the tablet be the "new" appleTV).
No, what Apple should do is relatively simple. Release new Apple TV hardware, running on relatively inexpensive, but relatively powerful, next gen mobile processors that can be used in future iPhone/touch devices. Eventually the mobile devices will be multicore. It might be a few years, but in the meantime Apple can leverage Apple TV to "test" the hardware, shrinking the die as time goes on, and therefore already have low cost processors ready to manufacture into new iPhone/touch devices years from now.
A multicore ARM Cortex A9 CPU and multicore PowerVR SGX GPU solution can be implemented right now or in the near future for relatively low cost, have low power consumption, and in a few years be shrunk down in size ready to put into new iPhone/touch devices. Apple TV would serve as a way for Apple to lower costs in the future and test the hardware.
And such a multicore CPU and GPU setup would be more than enough for 1080p support. Single core PowerVR SGX GPUs can process 1080p video right now. Multicore just makes it all the more efficient. Same deal with Cortex A9. Link the two, and you have a mega iPhone/touch hardware. And it would be relatively inexpensive to link that up with a 250 - 500GB HDD, built in WiFi, etc.
Since it would be a sort of superset of the iPhone/touch hardware, Apple can then simply open up the platform via an App Store, ala iPhone/touch. This can solve a lot of the issues people might have with it. There are TV streaming apps right now on the App Store, but in limited fashion (due to RAM and WiFi constraints). Apple TV streaming apps would resolve a lot a big issue folks have with

TV now: lack of Hulu, etc. Hell, Hulu is working on an iPhone/touch app, apparently. CBS.tv is already there, etc. So Apple doesn't seem to mind it at all.
DVR capability? There'd be an app for that too
A subscription option would be great too, if Apple can work it out with the providers.
The App Store would also extend the USEFULNESS of the Apple TV platform.
It wouldn't just be an entertainment set top box. Yes, there'd be movies, tv shows, music, and games, but there'd also be simple photo editing apps, office apps, etc. Apple TV then would transform into a low cost entry platform for Mac computing. Not as powerful or as full featured as iMac, Mac Mini, or Macbook, but enough to be a companion for current Mac owners, or an entry to Mac for newbies.
And as much as I like my idea of the multicore ARM and PowerVR SGX (as it makes business sense), Apple could use Tegra or whathaveyou. Just as long as the 1080p issue is resolved, and, more importantly, the app issue. There NEEDS to be an Apple TV specific App Store. This simple "fix", along with new hardware for 1080p, would greatly increase the usefulness of Apple TV.
Oh, and, IMHO, a new Apple Remote is needed. I don't like the idea of using the iPhone/touch as a remote. It only really is useful for iPhone/touch owners. No, this new Apple TV hardware should have it's own remote that is very much like iPhone/touch but not nearly as costly. It could be something like the new touch based Magic Mouse but in addition it would have the motion sensing/accelerometer of the iPhone/touch. Think the Wii remote, but with touch controls as well as motion controls.
And that would open the door to many a useful app, including games....