The bit depth of the panel and processor are what determines the gradations of color that the TV can display. Higher bit depth displays can display finer levels of color, though I'm not sure what the direct benefit of having 10-bit processing w/ an 8 bit panel is.
120hz is the refresh rate (the number of times the picture is redrawn every second). Standard LCDs refreshed 60 times per second (60hz). 120 hz sets are capable of doing double that. DVD/HD-DVD/BR media is generally recorded at 24fps (for film). Many other sources are 30fps. 120hz sets have the benefit of being able to display both of these formats without a conversion because 120/24 = 5 and 120/30=4. On a 60hz TV a 3:2 pulldown is needed to display 24fps media. This means that in 1 second there are 24 normal frames from the source. If we number these frames 1 to 24... each of the odd frames are trippled and displayed and each of the odd frames are doubled and displayed.... this creates 60 frames per second for the 60hz TV. Meaning that you get 1-1-1-2-2-3-3-3-4-4-5-5-5-6-6-etc... generally, this is not noticeable during a lot of the viewing; however, it can be VERY noticeable during slow pan shots in movies where the combination of very slow motion and non-uniform display time allow the problem to be easily spotted. A 120hz TV would simply display every frame of a 24fps source 5 times (for a total of 120fps). Similarly, 30fps sources get a 4x multiplier for 120fps on the 120hz set).
Note: 120hz is fairly new tech. There were only a handful of TVs last gen to feature this (most notably the samsung 71F series and sony's XBR 4/5). There still are problems to be worked out, and what you get does depend on personal preference. Some people don't like the way that 120hz sets make pictures look, some love it... I personally think that it looks good, but the price difference last gen was too much for me (so I bought a 60hz samsung instead of the 120hz sammy that was $600 more at the 40" size at the time). I'm very happy with it.