Digital cameras are starting to sort themselves into three major categories. There are the cheap point-and-shoots, anywhere from $50 to $200. They don't take bad pictures, by any means--I'm partial to Kodak in that range--but they're best set to "auto" and left alone. Those might be replaced by smartphone cameras relatively soon: the Apple  iPhone 4, Motorola Droid X, and Samsung  Galaxy S are all highly capable cameraphones.
There's the high-end DSLRs, the giant and expensive cameras that are largely a battlefield for Canon and Nikon. These have interchangeable lenses, tons of features, and range from "prosumer" to full-on professional equipment. They also range anywhere from $700 to $5,000 in price, and attachments like lenses often add hundreds of dollars.
The third category is the most exciting to the largest number of people: the high-end point-and-shoots. These are cameras both for people who know what they're doing (and want something portable) and for people who want to take bad-ass pictures and maybe learn a little about photography along the way. They're not necessarily harder to use than cheapie point-and-shoots, but they're much more capable.
The gold standard for this category is the Canon S90 . It's one of the first cameras to say "screw the megapixel race," and with good reason: it's a largely irrelevant spec, and more megapixels absolutely does not equal higher quality photos. Despite being a tiny whisp of a camera, the S90 takes unbelievable photos, especially in low-light, notoriously tough for cheaper cameras.
The new Panasonic Lumix LX5 is in this third category as well, and might usurp the title of most drool-worthy high-end point-and-shoot from the S90. Panasonic is well-known in photog circles as a damn fine camera-maker who sells great cameras for less money than Canon or Nikon due to a lack of name recognition in the category.
Like the S90, the Lumix LX5 eschews megapixel count, packing only a 10MP sensor. But it also has an F2.0, 24mm Leica lens and a 3.8x optical zoom. It'll take 720p video, and has an improved screen on the back so you get more accurate color reproduction in sunlight--a really valuable inclusion. It improves over its predecessor, the widely-loved LX3, with better image stabilization and face recognition, as well as a redesigned jog wheel for easier control.
The Lumix LX5, if it keeps or improves the series's vaunted image quality, could be the point-and-shoot to end all point-and-shoots.
It'll be available for $499.99 when it's released in late August. The price is a little bit steep, especially as the S90 is now only $299, but it looks very impressive. If you really want a stunning yet pocketable camera, give it a look.