Olympus' TruePic V image processor delivers excellent noise performance for this price class, with clean photos up through ISO 400 and good, only slightly degraded photos at ISO 800 and ISO 1600. While its high ISO performance is better than that of compact competitors like the Canon PowerShot G10 and Panasonic Lumix DMC-LX3, as well as Micro Four Thirds models like the Panasonic Lumix DMC-G1 and GH1, it's still not up to dSLR competitors like the Canon EOS Rebel T1i or Nikon D5000. (No space for ISO 6400 crop.)
Though they're not as compact as the lenses designed for Micro Four Thirds, you will see an improvement in photo quality using more expensive, full-size Four Thirds lenses like the 12-60mm f2.8-4 SWD lens with the optional adapter. Here, the better lens allowed me to gain a stop for a better exposure and less noisy shot.(ISO 800, 1/30 sec, f3.4, spot meter, AWB)
For such a compact model, the 14-42mm kit lens can be pretty sharp. It does a lot better at macro distances--and can focus pretty close--than at traditional ones, however. (1/100 sec, f5.6, spot meter, AWB)
Shot at the kit lens' widest angle 14mm (28mm equivalent), this shot would have had lots of fringing on the clear condensation if the lens distortion were severe. It doesn't, so it's not. Or at least the camera compensates well.
(1/320, f10, ISO 200, AWB)
The camera seems to have a relatively broad tonal range for its class. You can still make out a fair bit of detail in the shadows, plus there isn't a lot of noise. (1/200 sec, f6.3, -2 stops exposure compensation, AWB, ISO 200)
Though it's hard to tell from these surreally saturated captures of surreal colors, the E-P1 actually produces very good, accurate colors, and has dependable automatic white balance indoors and out. (Unfortunately, weather prevented me from getting some real nature colors with the E-P1.)