Absolutely Phenomenal.

My background is an amateur studio photographer, I grew up with film. I'm also a tech geek, I like to explore all of the camera's options. I never use a camera's onboard flash, I always shoot using available lighting. I take a camera everywhere I go.

My other digital cameras have been the Toshiba PDR-M70, Pentax Optio, the Casio Exilim, and the Leica Digilux 1.
The Optio was tiny and acceptable. But just that, acceptable. Casio Exilim was more hype than camera, with a big 2" LCD screen, but not great image quality, bad off-white balance even with manual settings, unacceptable soft focus and terrible noise levels, even in the lowest ISO setting.
The Leica Digilux is amazing and superior but it's too big to carry everywhere. Since Leicas use Panasonic electronics, it's what logically led me to this camera. I wasn't disappointed. It's like having the Digilux in pocket form.

I was initially reluctant to purchase the Lumix since it has no manual controls for focus and exposure the way my other cameras do. But the automatic settings have not disappointed me.

The color balance and brightness is far superior to any camera I've previously used or tried, even the Leica. The Leica lens has amazing clarity. The only problem is with burned-out highlights, you lose detail in the whites if you're shooting in a predominantly dark situation. But even with incandescent lighting, which usually gives an orange cast even with most cameras' electronic corrections, Panasonic has found a way to balance white properly without being overly blue.

I sometimes take photos at rock venues. Anyone with a camera, digital or otherwise, knows this is a challege. Underexposure and excessive movement of performers will confront even the best cameras.

See photos at http://tiregroove.com/boston2005.htm I took. they convinced me of the Lumix's merits. Keep in mind they're reduced images, so they would be not a good method to judge actual detail, but it's a perfect representation for a low-light situation from about 15-20 feet away. These were taken with the image stailization on the 1st level. Judge for yourself whether it bears out manufacturer's claims. Seems to work fine to me!

Panasonic was smart to team up with Leica. Their lenses are amazing. Beautiful contrast and clarity.

Another great advancement that other reviewers fail to mention or utilize is that the Lumix has an AUTOFOCUS-ASSIST-lamp feature for dark situations. It actually works, too. The key to taking full advantage of this camera is to use the MENU function and explore the options.

The same goes for noise. Use the MENU and change the ISO sensitivity for better results. Unlike the Casio Exilim and Optio, this camera will return much better reward at the low ISO.

Shutter lag is one of the few problems. There are times where pressing the shutter does absolutely nothing with this camera. That's one of the reasons manual focus and manual controls are an advantage, to cut down on electronic shutter issues. The less a camera has to process, the better.

The menus are highly accessible. Deleting photos is a minimal issue for a change. (don't manufacturers test their own cameras?) You can delete without having to change modes, and you can even choose multiple frames easily without having to "delete all."

The analog on-off switch and mode thumb-dial are a nice aesthetic touch. They seat firmly and don't slip accidentally.
The body is all-metal, feels solid and even a little heavy. The battery life is a little lacking though. If you think about it, it's to be expected since the screen is substantially bigger than the battery itself. Panasonic addressed that in the subsequent model, the DMC-FX8, supposedly with 1 1/2 times the battery life. The screen actually gets hot if you use it for a few minutes at a time.

If you buy extra batteries, try to find anything over 700mA for longer life. The camera shares the same battery as the Pentax Optio S.
The enormous 2.5" screen is an attention-getter, it's almost the entire back of the camera. Too bad Panasonic doesn't have the marketing team that Apple has. It's difficult to find Panasonic in the major chain stores.
I think this camera is the best-kept secret out there right now, especially at the price-point it's at, $300-$350? That's a bargain considering what else is out there.