They do have a "pancake lens" that's small enough. The camera is still too large for most pockets, but it would fit nicely in a variety of belt clip holsters. I don't believe Panasonic has announced prices yet, but its closest competitor, the Olympus E-P1 is selling for $800. The earlier Panasonic G1 is selling for around $640, which is where I bet the GF1 will be around Christmas.

Just keep in mind: this isn't meant to compete with pocket cameras. It's meant to compete with big D-SLRs. From that perspective, it's pretty small!