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MikeB said:

If this is mainly game engine related (and not hardware specs or such related), why not just delay this game and polish out obvious technical flaws? Microsoft has more than enough money to pay for such costs. Fable 2 is the last remaining big XBox sequel on the 360, pretty much a guaranteed million seller.

My guess is they pushed the 360 as hard as they could, and didn't want to have to re-engineer entire approaches just to correct minor annoyances.  Just having the money to do something doesn't always justify it.