Develop, Black Rock Studio (Pure, Split/Second) technical director David Jeffrries revealed that Microsoft has removed an item from its TCRs (Technical Certification Requirements) that stated all Xbox 360 games must run at a minimum of 1280x720 (720p) resolution if the system is in HD mode. According to Jeffries, this was done earlier this year so that developers could be "free to make the trade-off between resolution and image quality as we see fit."
TCRs are technical "rules" that all games developed for a given platform must adhere to in order to be certified for release. Of course, some games that have skirted this specific TCR have still been allowed on the system; the most notable being Microsoft's own Halo 3, which runs at 1152x640 (progressive).
Joystiq has confirmed with a trusted source familiar with Microsoft's TCRs that Jeffries' claim is legit. Not only that, but, as of March 2009, Xbox 360 developers are no longer required to utilize full-screen anti-aliasing in their games. The elimination of both requirements is especially noteworthy since the console maker had touted that all 360 games would run at a minimum of 720p with at least 2x FSAA since before the hardware launched.
As Jeffries points out in his column, 1280x720 isn't necessarily the "starting point" for HD on many displays and that it's not nearly as crucial as anti-aliasing. It's not clear if the back-tracking on Microsoft's part was due to pressure from the development community or not, but we can probably all agree that, as long as a game looks great, it doesn't really matter how its creators got there. Does it?