In order to ensure a consistently acceptable level of performance and usability across the platform, Microsoft has provided quite strict limitations on the hardware that will use it. This is in stark contrast to Android, which has found its way onto a vast array of handsets from super budget to hyper expensive.
All phones must have multi-touch capacitive displays (no unresponsive touchscreens here) with resolutions of at least 320 x 480 (all the launch phones have 480 x 800), use a 1GHz or faster processor, at least 256MB RAM, and at least 8GB of flash storage. A GPU with DirectX 9 support is also mandatory along with video accelerators – the OS has native support for DivX versions 4, 5 and 6 along with h.264. You're also guaranteed to find an accelerometer, A-GPS, compass, light sensor, and proximity sensor.
A five megapixel camera is also stipulated, along with a flash of some sort and a shutter button (so you don't have to rely on awkwardly reaching for an onscreen button to take a photo). The front button arrangement is also strictly set at Back, Start, and Search.
One potentially big mistake Microsoft has made with these specifications is disallowing microSD slots, so you can't add extra storage to your phone. Now given the 8GB minimum internal storage, this may not sound like too much of problem but, trust us, once you start filming HD video and downloading TV shows and movies to your device, 8GB will quickly run out, even if your music collection is quite modest. Moreover, only LG has chosen to exceed this minimum with the 16GB on its phones. Meanwhile Apple is still sitting pretty with its 32GB iPhone 4.
Now there is one fairly major caveat to this point. While Microsoft originally said that microSD slots weren't allowed at all, it has since come out that they can be added but they must be concealed under the battery and not accessible from the outside. This is because, once added, the space is merged with the internal storage making for a single drive (of 40GB if you add an 32GB card to an 8GB phone). If the card is then removed after being used for a while, it will corrupt the OS. Thus the only way to change the amount of storage is to backup your files, perform a factory reset and add the new card. None of the manufacturers we know of have gone this route yet, though.
So at least initially Windows Phone 7 may trail some competitors in terms of storage, but on just about every other front you can expect to have a fully featured and fast handset.