I would assume that it's similar to last year in that what they're looking for is more akin to "second-third playable" as opposed to "finished product". "First quarter of game" sounds about like what they asked for last year. None of last year's DBP games have come out yet for XBLA as far as I know, though Dishwasher is looking pretty polished and fun and on its way.
But yes, it would be great if someone from Microsoft would clarify the position - my guess is that they'll tend to favor more finished entries somewhat heavily, because I have to think they want to release some titles before 2010 and get the ball rolling on this thing.
(What they don't want is the first minute of gameplay and that's it, like I gave them last year...)