Regarding the 160 GB reduction to 120 GB, I strongly suspect that there's a 240 GB model that's going to be coming out very soon. The 240 GB toshiba drives weren't officially announced yet iirc, so Jobs wouldn't steal toshiba's thunder in the same way he loathes it when someone else does it to him. Now that the 240 GB drive are official, Jobs will announce a 240 GB iPod in a couple of weeks. Because it makes almost no sense to eliminate the larger iPod. It costs Apple virtually nothing to keep selling that extra model since they have another model they're still selling which uses 99% the same parts and design.
There will almost definitely be a 240 GB classic coming very shortly.
I would love for that to happen... most likely in February along with a Touch bump.
But more likely we will see it at 120GB and 200GB.
Because if it's 120GB and 240GB, it would seem ridiculous because the 240GB would have literally 120GB more than the 120GB model.