The iPhone has 128mb of active memory, which is around 110mb more than your average handset.
Memory is not the issue, Apple is simply yet to introduce this feature.
There are jailbreak apps available for the iPhone that do video, writing to the flash once random memory space has been consumed.
One possible reason for the lack of this feature could be down to the fact that many iPhones are almost full of music and photos, and that video at the resolution of the iPhone display would chew memory pretty fast. Still seems pretty debilitating in my opinion.