I recently purchase an AXIS network camera that will be used at a scrap metal yard to photograph truck license plates. While the camera is probably sufficient for my purposes I was a bit confused because it was advertised as an HDTV 720p camera but the image quality (still or video) is nowhere near as good as, say, any of the leading smartphone cameras. Apparently, this is because each image is only around 1 MP. If the image is aliased and blurry, in what sense is it "high definition"? It has "more lines" than my old TV, yet it looks worse than any other digital camera I've owned in the last 10 years. Isn't this term a bit misleading in this context?
HD simply refers to a given number of pixels in the signal, not some measure of quality. Even 1080p TV is lower resolution than the photos on most camera phones. Even the 4k video used in the latest Hollywood blockbuster movies is lower quality than the still photos of most camera phones. Video takes up far FAR more data than stills. If you think about it, 1 second of video contains between 24 and 60 individual photos depending on the format of video being used. Now there are ways to shrink the video since a lot of the pictures are very similar, but the quality that can be recorded is still much smaller than what we can process for a still.
The think is that an 8mp camera phone still doesn't shoot any better than 1080p video at most, so while it may take 8mp stills, it only takes sub 2mega pixel video. 720p isn't all that much better than an old 480 display. The main advantage is the progressive scan, but there still isn't that much more information (about double).
The other thing to note with security cameras is that they tend to be made to be durable more than high quality. The optics are probably not that great and they favor infinity focus over sharpness. They want everything in the scene to be reasonably in-focus instead of having any particular area really sharp. So between the optics, the design goals and the limited resolution, it isn't all that surprising that it doesn't render things that clearly since it isn't the goal of a typical security camera.
The term is not at all misleading though and based on your description, it sounds like it behaves like I would expect for the device. It is High Definition since 720p is a high definition standard even if the optics don't give you as sharp of an image as you'd prefer.
HD generally means that it complies with the HDTV standard in some form. This says something about resolution and frame-rate, since it is a video-standard, but says nothing about image quality.
720p is 0.9 megapixels, so your statement is correct. This resolution is fine for quick frames moving on a TV, it is not so much to resolve fine-details. Even so, there is no guarantee that the lens on a camera is capable of letting enough details through to fully take advantage of those 0.9 megapixels.
The camera's sensor possibly has 1,280 × 720 = 921,600 pixels arranged in a Bayer Pattern. Half of the pixels are green, a quarter are red, and the remaining are blue. It takes more than one such pixel to calculate an actual full-color pixel, through an interpolation process called demosaicing. This process leads to blurry images when viewed at full resolution. As for the aliasing: This is likely caused by in-camera digital sharpening.
Other factors that negatively influence the quality of the picture:
low quality optics, possibly also badly adjusted
Have you noticed, when watching tv, it is hard to read a license plate off a car if that said car is showing wholly with some surroundings on the screen? When the storyline of the tv-program needs to show you the license plate, they move in close and really show you the plate. Can't do better even when they do have very expensive high quality large lens videocameras!! And they produce 1080-lines to show true HD on your telly. Yet no reading the license plate. How could a small and cheap 720-line tiny lens surveillancecamera do any better? No, it does much worse.
As already stated in other answers, most mobile phone cameras beat most video cameras in still photos. Only if someone used the high quality videocamera to switch mode and take a still photo, then it quite likely would beat the mobile phone camera in image quality. But this small surveillancecamera is just no match. Calling it HD is perhaps misleading, but it never meant to say anything about the quality of single still frame, it is a video camera, after all. Video and photograph are not measured by the same standards.
HD video shown in HD television is max 1920×1080 pixel and minimum requirement is 1280×720 pixel. Fill that slot and the video can be called "High Definition".
Now, that's the television that makes the limits. Having a truly high definition surveillance video is possible after all. You just can't show the resulting video in normal HD television, you need special equipment for that, and then you got the license plates. Link to example photos of megapixel CCTV.