Best Allround choice: Olympus E-PL1
This is an interchangeable lens mirrorless camera. If you are not a photography geek, that means the following: you get the image quality similar to DSLR cameras, but in a substantially smaller form factor. On top of that, E-PL1 has a very nicely done Auto mode and a superb JPEG engine, so that straight-of-the-camera the pictures look good. Still, this is not really a pocketable camera. I can carry it in a jacket pocket, but I am a big guy and I have big pockets. Also, it has very decent 720p video quality. Sound is not very good, but if high quality video is of interest to you, you should be using an external microphone anyway (which you can hook up to E-PL1 via the hotshoe on top of the camera).
As I mentioned above, E-PL1 is an interchangeable lens camera, so if you decide to become more serious about photography, you can add more lenses to your collection. The kit lens (28-84mm equivalent) that comes with it is quite good, but over time I would switch to an assembly of the following three lenses (of the ones currently available):
1) Panasonic 20mm f/1.7 pancake lens for low light and portability:
2) Olympus 14-150mm zoom lens (not yet available from Amazon, but soon)
3) and Olympus 9-18mm zoom lens for wide angle shots
I understand that the whole system costs a lot of money, but if you want truly good image quality it will cost you. If you try to assemble a camera system based on any DSLR standard, it will cost you more for the same range of capabilities, but it will be much bulkier and heavier.
Now, here are some recommendations for cameras with non-removable lenses:
If you really need to put a camera into your pocket, I suggest you take a close look at Canon S90:
The image quality is definitely not as good as you can get with larger cameras (like the Olympus E-PL1 above). However, you are more likely to have this camera with you when you need to take a picture. User interface is nicely done and image quality is about as good as you can get out of a Point-and-Shoot camera at the moment. Auto mode is very competent, plus you have well executed manual controls.
Another contender for a high image quality compact contender is Panasonic LX3:
Personally, I like the LX3 a little more than Canon S90. It has a wider and faster lens as well as a hotshoe for adding accessories (like an external flash). As a matter of fact, if you simply want to use a high quality point and shoot based system to use for damn near anything, LX3 is not a bad way to start.
On a flip side, it has a lens cover that is not built into the lens and has to be removed manually. I find that inconvenient in a camera that I might shove into my pocket. Also, it does not have any telephoto to speak of: the focal range equivalent is 24-70mm. I find wide angle more important for most things I do, but YMMV.
Another advantage LX3 has over Canon’s S90 and G11 is high def (720p) video capability.
LX3 is being phased out, with its replacement, LX5, slated to be introduced by the end of the year, so the prices are good right now (this started out as a $500 camera).
Since I mentioned Canon G11, I should note that it is another piece that makes a superb base for a camera system not based on swapping lenses:
G11 has superb build quality, very decent image quality (similar to Canon S90 and Panasonic LX3, but not in the same league as Olympus E-PL1) and a rather versatile 28-140mm equivalent lens.
On the downside, it is pretty bulky and only offers standard definition video. Somewhat oddly, it is one of the few point-and-shoot cameras that still has an optical viewfinder, albeit a small and crappy one. Still, in bright sunlight when the LCD is not easy to see, the optical viewfinder is very useful.
All of the cameras I have mentioned so far are not exactly cheap. The cheapest one is over $300. A lot of people I talk to just wan to take pictures and find $300 way too much to spend on a camera. On top of that they want something with both wide angle and some telephoto.
For them, one of the fairly ubiquitous “Travel Zoom” cameras is the way to go. There are quite a few of them and they are all pocketable or near-pocketable designs with 10x or 12x zoom lenses. Panasonic effectively invented this category a few years ago, but now every major camera maker has a model or two in this category, and most of them are pretty similar.
None of these cameras are particularly good in low light, but they are serviceable otherwise and very versatile.
Here is the one I like out of the current crop: Casio EX-FH100
This Casio has about 3 times more battery life than its competitors, fast autofocus, excellent wide angle and compact form factor. Image quality is not really better than competition, but not worse either. Oh yeah, and it costs a fair bit less than the other cameras I mentioned above..