I've been toying with the idea of buying an Apple TV for ages, but the original model cost the best part of £250 and – in the early days at least – the choice of films on iTunes was limited.

But the arrival last week of the new Apple TV at just £99 finally persuaded me to take the plunge. The box is tiny (9.9cm square, 2.29cm high), a fraction of the size of the original, but no longer includes the 160GB hard drive of the earlier version. So instead of having to sync your iTunes content to the box as before, this one is just a streaming device.

Yes, it really is that small

Set-up is simple. Plug in the mains lead, use an HDMI cable to connect the Apple TV to your television or home cinema amp, and add an optical digital cable if you want to send surround sound to your home cinema system.

I routed the audio and sound through my Yamaha RX-V2700 home cinema receiver, and from there to the TV.

Set up is simple: HDMI carries audio and video

When you first install it, the screen menu will ask you to select a language, then your home wi-fi network and password. Alternatively, you can hook up to your broadband network using the Ethernet connection.

Once that's done, and it only takes a couple of minutes, you need to set up Home Network Sharing by entering your Apple ID and password from your iTunes account. Apple TV comes with a smart, slim aluminium remote which is nice to hold, but navigating the on-screen menu to type in your ID and password is a bit fiddly. And it's not immediately obvious that you need to keep pressing the Menu button to scroll backwards through the menu options.

More after the break

Small remote is a bit fiddly to use

Next, you'll need to make sure Home Sharing is turned on in iTunes on your computer (go to iTunes/Advanced settings, turn on Home Sharing, type in your Apple ID and password and click Create). You'll need to be running iTunes 10 or later.

If you want to use Apple TV to show your photos on the TV, you'll also need to select which photos you want to share from iPhoto (iTunes/Avanced/Choose photos to share).

Now you're good to go. Scroll left to right on the Apple TV menu to choose between Movies, Internet, Computers and Settings.

Films but no TV shows for streaming

Movies gives you a selection of films to rent, in both standard definition and high definition (720p). HD films typically cost £3.49, SD ones £2.49 and you have up to 30 days to watch them before they expire.

I watched The Girl With A Dragoon Tattoo in HD. You'll have to wait a while before you can start watching while it buffers – a message came up on screen initially saying "Ready to play in 70 minutes", then it jumped to 86mins, 865mins (!), back to 173mins and then 36mins. In the event, I had to wait about 15 minutes before play could begin. Once you start watching, you have 48 hours to view.

Generally picture and sound quality were good – broadly equivalent to broadcast HD – with the Dolby Digital 5.1 soundtrack coming through loud and clear. But there was evidence of judder (perhaps inevitable with wireless video streaming) and the film did freeze on at least four or five occasions, usually during a particularly dramatic scene, which proved frustrating. Going back to the main menu and selecting "resume play" was the only way to get it going again.

A wired Ethernet connection might have proved more stable – I was using my Virgin 20Mb broadband connection via an Apple Extreme 802.11n wireless router.

I fared better with a digital download of Sherlock Holmes, stored in iTunes on my Mac. Again there was some picture judder, but at least the film didn't freeze midway through.

In addition to iTunes films, you also get access to YouTube, Flickr, Mobile Me and internet radio stations – but no Netflix movie streaming service as available in the USA. And, for now at least, there are no TV shows available for streaming in the UK.

Internet radio gives you a wide selection of stations, although sound quality varies enormously and some of them – such as Classic FM – didn't work.

While you'll have no trouble streaming content from iTunes, Apple TV doesn't support all formats. Yes, it's compatible with H.264 M4V, MPEG4, MOV and M-JPEG AVI video, plus HE-AAC, AAC, MP3, Apple Lossless, AIFF and WAV audio, but it won't handle DivX and DivX HD/MKV. Dolby Digital 5.1 is supported as pass-through to your home cinema system. 

As for HD video, the device handles resolutions up to 1280 x 720, but not Full HD 1080p content.

Still, Apple TV has some other clever tricks up its sleeve. It works with Apple's Remote App, so you can control it from your iPhone if you find the standard remote a bit small and fiddly.

Apple remote app gives full control from iPhone

And it's also compatible with Airplay, which will allow you to stream content from iOS4 mobile devices such as an iPhone, iPod Touch or iPad directly to your TV. That functionality will depend on the next upgrade to iOS4 (v4.2) due in November, so we haven't been able to test it yet.

In theory the ability to shoot some video footage on your iPhone, rush home and immediately play it back on your TV via Apple TV to show your mates sounds pretty appealing.

You'll have to wait until the official review is published in the magazine for our full verdict on the new Apple TV, but for now it's certainly a convenient way of wirelessly streaming your movies, music and photos from a computer to TV, even if it has its limitations when it comes to watching films. Still, that £99 sticker price makes it much more appealing than the old model.

Read our full Apple TV review