Over at the::unwired.net, Arne Hess does a fine job of explaining the memory requirements of Windows Phone 7 and helps shed light on what is turning out to be a complicated issue (see our earlier coverage of the Samsung Focus & its SD card).
Turns out he was able to disassemble his (pre-production) HTC HD7 and replace the storage card after some finagling (he had a problem at first). He also explains how the memory works on WP7--basically it's not like a RAID system, but rather it concatonates the memory installed into as and reads it as one big drive. Removing a storage card requires a hard reset in order to get it working again.
Finally, he mentions that the reason for this SD card usage, instead of installed flash, is cost. OEMs can save money by using SD cards which are easy to upgrade and replace as opposed to onboard solutions which are more pricey and restrictive. Seems to make sense and even though it's confusing for us, we bet OEMs might like this for production purposes (remember how everything was 8GB then magically almost all WP7 devices went 16GB? Yeah, that...). It remains to be seen, however, if all WP7 devices use this method or not.