A completely new interface (similar to the Zune), greater hardware specs and better integration with Facebook and Microsoft products. Essentially this phone is a catch up to where the iPhone and Android mobiles currently are.
On the 1st of September Microsoft announced they had completed testing, over 10,000 devices running automated tests daily and totalling millions of hours of testing. Now they are sending it out to partners to allow them to get ready for launch.
So we have a phone that will have almost caught up with the other players, what is the point in getting one? The main advantage comes in the integration. You can expect great integration with Office products, Xbox and social networking.
You can expect the phone to be released in time for holiday season in the US.
You can find out more at Microsoft Windows Phone 7.