The 5MP camera on the Nexus One (and similar phones) is technically capable of 720p recording, but does not support it out of the box. A smart cookie by the nickname of Charan Singh at XDA has figured out how to get this working and there is now an easy way to apply it to your N1 (must be rooted). It’s inspiring to see community-driven work yielding such excellent results (especially with manufacturers now pushing 720p recording as a big selling point, such as Apple/Nokia/Samsung).
Note that it currently functions under Cyanogen’s 5.08T3 ROM (based on 2.1). Just flash this update.zip in recovery and you’re off. The limitation at the moment is a 20fps cap, with 480p recording at 30fps. No doubt further tweaking will bring the video quality up at a later time, but keep in mind the picture quality is still primarily dictated by optics. It’s also just a matter of time before this becomes applicable to other rooted Android devices.
Download here: http://www.megaupload.com/?d=6O7MN446
Source code here: http://github.com/charansingh
Here is a sample video recorded with the N1 (click full screen/720p quality):