All updating to the graphics engine, flight model, damage model, micro-terrain, etc. can be thought of as AH II.
"Classic" will be what we now know as the MA arena and TOD will be a new arena.
The main difference between Classic and TOD is that TOD will have pre-written missions that will be launched and executed by the TOD server, where as Classic is completely dynamic.
HT told us at the con, that the "Beta" will be released for Classic first. Any and all "bugs" or "unexpected features" will be ironed out using Classic before TOD is launched. This makes perfect sense to me.