Olympus recently announced the EP-1, a camera that uses the same size sensor as their DSLRs, but in a camera roughly the size as the Canon G10, Canon's best compact camera. The EP-1's sensor is 5x bigger than the G10's! Its lenses need to be heftier and autofocus becomes tougher as depth of field gets smaller, yet they fit it into a similar sized package. Plus, it takes interchangeable lenses of an open standard (micro four thirds). When I visited B&H in New York last month, i tried out Panasonic's micro four thirds camera. It was only slightly smaller than my D40 SLR, so it was not impressive, but the EP-1 is a different beast.
The EP-1 is a bit pricey, and i probably won't get one because it lacks a built-in flash, but i'm sure it's just the first of many cameras of this design. I would not be surprised if in a few years this type of camera outsells SLRs.
Cameras can still get a lot smaller with large sensors. In college i used an Olympus Stylus Epic, a film camera that was pocketable, still much smaller than the EP-1...and of course, the 35mm film is 4x the size of the EP-1's sensor! I've read that the reason today's larger digital sensors can't be put into cameras of this sort is that digital sensors can't handle light at sharp angles well, but that's bound to change in the future. After that, maybe we'll get some cool flexible or liquid lenses that are more eye-like. And the best would be a smart dude in the camera to give us photography lessons.