According to Gizmodo, “a friend in the industry” has notified them that the iPhone currently can handle1080P HD video. Clearly with the iPhone screen being the size that it is, HD doesn’t quite make a ton of sense.
However, there is information surfacing that indicates the new iTunes software, iTunes 8, will offer HDTV versions of television shows. Currently, Apple’s HD movie rentals are actually in 720p so the iPhone will be more than capable of handling this content natively without the need to convert from HD video. As mentioned at Gizmodo, with the right adapters, this could allow iPhone users to view HD movie content on television from the iPhone.