A minimum of 256Mb of ram is required to record and playback HD Video on a Windows Phone 7 device

As I’ve already pointed out several times in the past weeks there’s no way to natively playback HD videos on Windows Phone 7 devices unless it’s a HD video (720P) directly capture by the phone’s camera. Every-time you want to copy / sync an HD video to your Windows Phone 7 handset  (via the Zune desktop software) the file will be automaticaly transcoded to a 800×480 file  for played back on the phone. On the other hand, if you capture an HD video with the device the video will normally played back without any problem on it (it will obviously be downscaled to fit the WVGA screen, but this is done on the fly by the hardware scaler and doesn’t affect the video file). Microsoft has now officially noted that only devices with a minimum of 256Mb of Ram will be capable to this. Thankfully there isn’t a single WP7 handset with less that 256MB of Ram so there’s no reason to be worried.

If your Windows Phone has 256 MB RAM or higher and your manufacturer has added the option, you can record and play HD video (1280×720 high-def resolution). To play HD video on your phone, the video is scaled down to an 800×480 resolution to fit the screen. If you connect your phone to your computer and copy the video to it, you can play HD video in its full 1280×720 resolution.

source: Microsoft