In the next Gears of War update users running 1280x1024 monitors will get true 1280x720 (720p) image letterboxed within 1280x1024. This should give the full HD experience.
Many users spoke up and said they favored playing the game at higher resolution in a letterbox rather than playing it in full-screen mode. To achieve the proper aspect ratio in full screen mode we had to render at 900x720 (the next usable 5:4 resolution below our maximum of 1280x720) and then let the Xbox 360 scale to fit.
As a temporary measure one of our programmers suggested that between now and the next update that users of 1280x1024 monitors might find the picture more pleasing if they set their Xbox to 1024x768 - the aspect ratio is pretty close but the actual resolution is about 45% higher.
We apologize for the inconvenience this might have caused. I'll try to get an estimated date for the next update and post it here in the forum as soon as I can. We appreciate everyones' patience with this issue.