It really depends on your industry.
Can your products be easily split down into seperate sites? Look at this way - are users only browsing on "set" of products?
If so, then yes split the domains - and add plenty of new content for each (ie, how to use widgets, how to maintain widgets, other users for widgets, etc).
However, if users are more likely to want to browse each product then pick one to buy, you are better off keeping them on one domain and working on the layout, naviagation and sales conversion.
I think there is a misconception that you need really high traffic to get more sales.
Why dont you work on coverting what you have first? It will make any future expansions much more profitable.
Have your company profile, product support, aftersales service, sales pages, etc all well laid out (and easy to navigate to and from).
For example, a lot of sites have a single "about us" page with a paragraph of text.
What Ive done on one of my sites (and im sure many others do) is use the about us page to subtly sell users.
Start with a welcome to the site and a few lines about the company.
Then a bulleted list with links to other about us pages (our history, link exchanges, contact us, our goals, our promise to our customers, FAQ's, etc etc).
Each of these sections should lead naturally on to another. Ie, your contact page should led on to sales enquiries, product searches, etc.
To answer your questions:
>1) By using one product/colour/size per page I could make 120 pages, by using multiple legitimate ways to get there (the same products sell for many reasons) I could increase that by a factor of 10 over a number of levels. ... is this worth it?
Yes and no.
Yes, its a good idea, but dont go overboard! :)
I would lay it out like this (although I dont know your industry, so may not be appropriate).
One page per product - description (lots of keywords) / photos / options on product (alternate colours, and sizes) / links to other sections (possible uses for this product, order this product, enquire about this product, etc).
In the "alternate uses for the product pages" you can SEO them and end with links backs to the sales page. Try optimising these all for slighly different keywords to catch different surfers.
>2) They have a number of domains (on the same ip) which just point to the main site, is it worth making these seperate sites with the same content and if so would it be wise to link them (I could always buy another ip address but it would have the same initial figures probably)
Same content? Nope.
Completely different sites? Yep.