Let's not forget, the Xbox 360 has only 512MB of RAM. Minecraft is an extremely memory-intensive game. Limiting the world size probably went a long way toward cutting down its memory usage. 1024x1024x128 works out to 134,217,728 blocks, and if they're using 16 bits per block, that works out to 268,435,456 bytes (256MB) for the whole world. It's probably compressed on the hard drive but the game probably loads the whole thing into memory, leaving the other 256MB to remaining game data and the core code. I imagine it took some tight programming to work within those constraints. Probably helped that it wasn't written in Java.