In a call with HomeTheaterReview.com yesterday, Apple denied the rumor and clearly stated, "Apple sells HD content in 720p" in no uncertain tones.
Apple has well over a million consumers buying movies from them. This represents a new way to distribute movies for major studios and indie projects. On May 5, 2009, April Showers, the film concerning the Columbine shootings, will be the second movie ever to "day and date" release on iTunes. April Showers is the first movie made in native 4k video and promises to look very good at 720p video.
In the event Apple ever does upgrade to 1080p, which would require significantly larger files and likely slower download times, they would inspire the fear of God in Netflix, which has increasingly upped the cost for Blu-ray rentals for their best, most fervent HD movie enthusiasts. The draw with Netflix is their ease of use and HD content. Apple is even easier to use for anyone with an iPod touch, a Mac, an iPhone or Apple TV. Netflix's recent abuse of goodwill with their consumers is already paying dividends for Apple, but the addition of HD would be yet another blow to Netflix.