Microsoft demoed the latest build of its Windows Phone 7 operating software today, on a prototype LG Panther handset (previously unveiled back in February) which is currently being used by a senior company executive.

For all intents and purposes, it was working very smoothly, and gave an excellent glimpse at the potential of the new OS as many of the major features were up and running.

One stand-out aspect dwelled upon in the demo was intuitive and seamless Facebook integration, with the phone automatically pulling contacts' updates when you access them via the address book. They're current status details appear alongside phone number, address, etc.

Another cunning feature on show involved the software's recognition of street addresses, and its ability to then offer one-click access to map locations and details (via bing, of course). Every application, including email and text, automatically creates a link for an address.

Zune, the software's media player, was working too, with both music and video content running quickly and clearly. And Alex Reeve, the organisation's UK Mobile Business Group director, confirmed that Microsoft will be bringing the Zune store to the UK in time for launch, for download of media content, including music files.

One nice feature of the Zune player is that it will find album art for you, through the phone itself. If you've dragged and dropped MP3s from a different location, and they don't have art or are missing other metadata, Windows Phone 7 will find the details for you. Obviously, this is not a feature of the iPhone.

Xbox Live support is to be built into a later build of the software, so we couldn't see that in operation, but Reeve stated that it will "grab your Avatar" and that you'll be able to download "Xbox Live Arcade Games" through this specific tile.

Microsoft does admit that "it is a challenge" to get people to understand a smartphone that is not just "a sea of icons", but it's certainly heading in the right direction in creating something that is easy to understand but has an awful lot going on under the hood, at least as far as this demo was concerned.

As for the LG Panther, it ran the system very smoothly, had an intuitive touchscreen (although it could've been a little more responsive), and the slide-out keyboard will make social networking much easier. It was also confirmed, whether right or wrongly, by Reeve that this phone is definitely going to be one of the handsets launching when Windows Phone 7 is ready.

And, what do you think? Do you reckon, with the iPhone and Android, that another smartphone OS is necessary? Are you one of those addicted to social networking on your mobile? Let us know in the comments below...