[citation][nom]meat81[/nom]Please pardon my ignorance but how is a 1280x800 HD display going to display 1080p video?[/citation]Same way you display it on a 720p plasma. By downscaling it. The reason they mention it is because they're saying it has enough horsepower to decode (play) the 1080p video without requiring you to re-encode it on a computer first. That is important. Yes, you won't be viewing it at full native 1080p resolution, but on a 10" display the pixel density is high enough you won't be able to tell, as long as they scale it properly.
For reference, the Xoom's 1280 x 800 display is significantly higher resolution than the iPad, which stands at 1024 x 768. Granted, the iPad's screen is slightly smaller, but even so it still has a lower pixel density than the Xoom. The Xoom has a PPI of 160, vs the iPad's 132 PPI.