The Four Thirds system governs image sensor sizes and the mounting mechanism for interchangeable lenses on the companies' SLR cameras, and the companies announced a new variation called Micro Four Thirds for smaller cameras that have SLRs' interchangeable lenses but not SLRs' "reflex" mirror, which directs light through an optical viewfinder before a shot is taken.
Four Thirds SLRs have a smaller sensor than lower-end SLRs from market leaders Nikon and Canon, which poses image quality challenges because there's less surface area to gather light. However, the sensor size is the same for Four Thirds and Micro Four Thirds, which means that cameras using the latter have a much larger sensor than typical compact cameras have.
The DxOMark Sensor test score shows these differences. The Panasonic G1 gets a score of 53 on the DxOMark Sensor test. That's a big notch above the 37.8 from the highest-end compact out there, Canon's $405 PowerShot G10, whose sensor is larger than most point-and-shoot cameras but still smaller than the G1's.
On the other hand, it's a step down from the 63.9 scored by the $600 Nikon D40X, a lower-end model that's among the smaller SLRs out there.
To summarize, the G1's sensor quality looks good, when compared to that of compact cameras, but not as good when compared to that of bulkier SLRs. It all depends on your frame of reference.
Things should get more interesting when Olympus launches its Micro Four Thirds models. Don't hold your breath, though: so far, Olympus has only showed prototypes, and the company told me that it won't be announcing any at the Photo Marketing Association (PMA) show in early March, as some have expected.
The comparisons are more direct when comparing lower-end SLRs, and here Olympus generally trails competitors by a bit. Its E-510 gets a score of 51.6, and its E-420 gets 55.8. Compare that to scores from a range of competitors that all have slightly larger sensors: 56.2 for the Nikon D40, 64.5 for the Nikon D60, 60.9 for the Sony Alpha A100, 65.4 for the Sony Alpha A350, 66 for the Pentax K200D, 61.6 for the Canon Rebel XS, and 60.6 for the Canon Rebel XSi.
Note, of course, that sensor size and sensor quality, while important, comprise only one factor. These scores don't account for price, autofocus, durability, lens selection, and many other factors that also weigh into a camera's overall merit.