1)
2) Apple is doing so well with Itunes, Music, Movies, Tv shows, applications, they cannot just give up in the living room, no way.
I don't think anyone is claiming Apple will give up on iTunes. But this doesn't mean they haven't given up on ATV. Its very possible that they have concluded the ATV to be fatally flawed (jobs himself has admitted the original strategy was flawed)...in which case, they may be developing something entirely new and different.
I'm betting on this one...they will use ATV as a bridge until they get whatever new idea they have up their sleeve out the door...
TV is a core product for Apple, as we move away from disks and physical hardware and to downloading movies and music off of iTunes and transfer them wherever we want. This, I believe, is why there is no BluRay on Macs -- Apple wants us to move forward instead of getting stuck in this little phase and of course they also want us to use their iTunes software. I think that within a time scale of 2-3 years, we will have moved over from physical disks to software downloads for all of our media interests.