There have been a lot of questions on forums about the SD card support in Windows Phone 7. The SD card is not used the same way in a Windows Phone 7 device as it is in many other smartphones, and this can cause some confusion. In this post, I don’t want to discuss whether this change is a good idea or a bad one. I just want to dispel some confusion by stating the facts as I understand them. I’m not an official spokesperson for the Windows Phone team, but I have some information that might be helpful to the average consumer.
The first point is that the SD card should be thought of as if it were your phone’s hard drive, not as removable storage. Not all Windows Phone 7 devices support replacing the SD card, and if the device does support replacing the SD card, you’ll have to perform a factory reset (losing all of your settings and saved files) as part of the replacement process. The phone won’t work correctly if you remove the SD card. Replacing the SD card on a Windows Phone 7 device is like replacing the hard drive on a desktop PC.
It follows that a slow SD card will have a big impact on the overall performance of Windows Phone 7. Adding a slow SD card to the device will slow down the whole phone. Unfortunately, determining whether an SD card is “fast” or “slow” requires a lot of testing, and the advertised “class” of an SD card has almost nothing to do with how well it will perform in a phone. SD card “class” measures how quickly an SD card can save a single large file such as a photo (think of this like you would think about a car’s top speed). Windows Phone’s performance is more affected by how quickly the SD card can load and save a whole bunch of tiny files (think of this like you would think about a car’s performance in an obstacle course). Don’t fool yourself into thinking that any old SD card will work or that a higher "class" of SD card will make your phone work better. Microsoft tested a whole bunch of different SD cards. Very few performed well enough to be approved for use in the phone. SD cards that are not "approved" may work correctly, and may even work well, but they may also work poorly or not at all. Unfortunately, the SD card’s “class” won’t be very helpful in predicting how the card will perform in the phone.
Finally, the SD card is locked to your phone, and data on the SD card is encrypted. The data on the SD card can only be read by the phone, and cannot be read by other computers or phones. The encryption key is set when the phone first boots after a factory reset. Once the SD card has been locked, there are two ways to unlock it. The first is to provide the encryption key, which only your phone can do. The second is to perform a low-level reset on SD card, which erases all of the SD card's data. The phone will perform a low-level reset on the SD card during its first boot after a factory reset, and will then lock the card to itself. Unfortunately, I don’t know how to do a low-level reset on an SD from a desktop computer. This means that once your SD card has been locked to a Windows Phone, it won't work anywhere else. (In the future, tools might become available to reset the SD card, but for now, you should assume that the SD card is no longer usable.)
Official Microsoft KB article: http://support.microsoft.com/kb/2450831
Hope this helps!
2010/11/10: Minor editing, added link to KB article.