I could hardly believed there was a fixed screen resolution (and such a low one) for WP but wikipedia[0] seems to agree (although a citation is needed).
Yeah, I’m almost certain that’s accurate from everything I’ve read.
As to why the fixed resolution, my guess is it’s reflective of MSFT’s desired positioning for WP as sitting in the middle of a Mobile OS spectrum; between iOS (totally locked-down, fully integrated hardware/software) and Android (completely open, fragmented hardware/software). In a sense, I guess that’s where Windows has always been, though with WP, it leans closer to the iOS side. Given that, having strict requirements, like that on screen resolution, go towards providing a consistent experience across devices (regardless of OEM) and ensuring all apps work and display the same on all devices, making development easier as well. The way I see it is you get iOS consistency and security (and some limitations) with the broad device/form-factor selection of Android (less the fragmentation); though, as evident by the resolution limitation, there are of course some compromises made with this approach.
Also, rumor has it [1] that these limitations are largely being relaxed with Windows Phone 8 (aka ‘Apollo’) and the OS will support 4 resolutions. I believe MSFT is holding an event to announce details on WP8 in a week or two.
[0] http://en.wikipedia.org/wiki/Windows_Phone#Hardware