Servo question

Here is a question that I have been meaning to post for some time
now: I read something at the Innovative Automation site (maker of the
Servo Lite motion control system) a while back that caught my
attention. The creator of the Servo Lite system wrote:

"For Servo Lite to work properly you need an encoder that will give
you a pulse output that is 10 times the accuracy you are seeking. If
you want accuracy of .001 inch you will need an encoder that has a
resolution that will give you 10 pulses per .001 inch of travel when
coupled through the gear reduction and encoder decoding_"

My question is this:

Is this true with all servo setups, and if so, why?

-Tom Murray

Innovative Automation is at:
http://www.isomedia.com/homes/billmw/