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...