Windows Phone 7 is a do-or-die situation for Microsoft. You can read why in more detail here , but for now, just believe me: If Microsoft  doesn't knock it out of the park, they might be sitting on the bench for the entire smartphone game.
We haven't gotten all that many detailed looks  at Microsoft's new mobile OS--when it was announced in February at the Mobile World Conference, the software was in early beta (or possibly alpha) and the hardware consisted of unbranded black plastic slabs. But Wired just got their hands on  what looks to be a near-final version of Windows Phone 7 running on what could well be one of, if not the, first WP7 handset. (Engadget  also has an excellent, very in-depth look at the new OS.)
The software looks pretty good, for the most part: Thanks to the mandatory minimum 1GHz processor, it certainly looks speedy, with a whole lot of flashy "folding" animations that are essentially an extension of the Zune HD (a good thing). There's a nice level of consistency throughout the apps demonstrated, with the same text and same side-scrolling user interface. That kind of attractive consistency is something iPhone (and Palm WebOS) customers are well accustomed to, but something still a bit out of reach of Android.
Windows Phone 7's app ecosystem is still unlaunched, so we can forgive the lack of apps at the moment--after all, the phone won't launch until November, a few months away. The music player, a version of the Zune software, looks excellent, though Wired notes that there are, oddly enough, two separate marketplaces from which to buy content. There's the Zune Marketplace, from which you get music and video, and the Microsoft Marketplace, which has apps (and possibly music as well? It's unclear).
The integration of Xbox into the platform is also kind of shrug-worthy so far, restricted to checking Xbox Live gamerpoints and updating profiles. Gaming is one of Microsoft's biggest strengths--show us what you can do, Microsoft!
Voice command looks essentially useless at the moment. That feature is something Google has mastered with Android, and the Windows Phone 7 demonstration looks laughable in comparison.
Everyone seems to love the keyboard, rating it nearly as good as the iPhone's and significantly better than Android's or BlackBerry's.
Boy Genius Report notes one disturbing omission: There's no app switcher. To switch between apps, you have to hit the back button until you're at the home screen, then switch to the app list, then select another app. Very annoying. And in a throwback to the old days of the iPhone, there's no cut-and-paste and no third-party app multitasking.
I do have to say that while the square tiles and bold colors of the home screen looked appealingly retro in mockups, it looks a bit flat in practice. I think part of that is the fault of the hardware, which is, in my opinion, both boring and ugly. Fortunately, the hardware is not bound for retail shelves--it's only for this developer (and select journalist) preview.
The phone used for the demo is a Samsung  smartphone, with a screen that looks to me like a 3.7-inch full widescreen device--shaped more like an Android phone than an iPhone. It's packing a 5MP camera, which Wired says is acceptable, although camera performance can be drastically enhanced through software.
The phone itself is emblematic of Samsung's last-generation smartphones, like the Omnia  and Behold , rather than the more understated design of its newer Android devices like the Captivate . That cheap-looking shiny silver border and those clunky buttons are hardly the makings of a drool-worthy design. Windows Phone 7 is such an unusual and striking OS that it really needs hardware that can hold its own--one of HTC's angular metal designs, like the Legend , would be a much better fit. Again, this phone is just a prototype, but its ugliness shows how important the final hardware product will be.
All in all, Windows Phone 7 looks okay so far. There are definitely some clumsy elements, but those are really to be expected from a new mobile OS. The first iPhone was incredibly limited--you could argue that it wasn't even a smartphone, as it had no apps. Android was slow and ugly as molasses when the T-Mobile G1 launched. So Windows Phone 7 might, like most mobile OSes, need a year or so to mature. Whether it can survive that long is up to the consumers and, in turn, the developers.