Succeeding the G2, the Lumix DMC-G3 is substantially smaller, but still pretty large to be considered a compact alternative to a dSLR. In fact, although I like the G3 very much--it's got great photo quality, solid performance, a comfortable shooting design and a reasonable feature set--I'm still not quite sure who it's for.
The G3 has a new 16-megapixel sensor; though it's the same resolution as the GH2's, it's a less sophisticated (and cheaper) one. For the sensor, Panasonic has added on-chip noise reduction, similar to the scheme used by Sony's Exmor chips, along with the Venus Engine FHD image processor that's in the GF3 and GH2.
That change seems to have made a difference. Our test shots for the G3 at varying ISO sensitivities look much better than those of the G2 in part due to the much-improved JPEG processing (since the necessary raw codec isn't available I can't yet tell if the image comes off the sensor cleaner). Photos look good up through ISO 800, with just a little softening from luminance noise reduction kicking in at ISO 1600. Most important, the JPEG artifacts I've seen in previous models at lower ISO sensitivities or high ISOs in good light were gone.
Colors look pleasing and saturated, but the slightly cool auto white balance in daylight shifts the reds, pinks, and greens just a little. Exposure is accurate and consistent.
My one gripe about the images: For shots without fine edges, the level of sharpening looks good, delivering a natural appearance. But edges on fine objects like hair or fur display a visible aliasing (jaggies) in the standard setting. You can scale back the sharpening, though.
The in-camera distortion control does pretty well straightening curvature with the 14-42mm kit lens, but it leaves just a smidge of vertical distortion that makes it appear as if the camera isn't parallel to the wall. This shouldn't be noticeable on most photographs though, unless you shoot a lot of architecture (for which you probably wouldn't want to use the kit lens, anyway).
The company has also changed the names of a couple of features to make them more approachable: Film mode is now Creative mode and My Colors has become Photo Style. I was not impressed with any of Panasonic's creative effects, in part because they're almost completely automatic--you can't adjust the intensity of the effect--and the results are pretty boring.
The G3 incorporates Panasonic's Light Speed autofocus system from its more recent cameras. That AF system drives the sensor at 120 frames per second to more quickly iterate down through the contrast autofocus decisionmaking process. While the G3's performance is better than the G2's, even with the updated AF system it's not as fast as the GH2 and can't keep up with the phase-detection-based SLT-A35 or comparable dSLRs. Panasonic claims the system is more accurate than phase detection at wider apertures, but in practice found it no better and no worse. I didn't run formal tests, however.
It still feels reasonably fast for most types of shooting. You can power on and shoot in about 0.9 second; it takes about 0.4 second to focus and shoot in good light, increasing to 0.7 second in dim. It takes 0.6 second for two sequential JPEG shots and 0.7 for sequential raw, but it seems to take a bit longer than usual to save raw+JPEG files than usual. It doesn't hold up shooting, but sometimes powering off the camera was held up by writing to the card. Shot-to-shot time incorporating flash recycling adds about a second. Continuous-shooting delivered 3.3fps, but as with many of these cameras successfully burst shooting is more a matter of luck than intent; similarly, the tracking autofocus can track within a ballpark area but as with most of these systems can't really differentiate, say, a squirrel's head from its tail or follow it fast enough. The other performance issue is battery life--as in, it's short.