What a difference this upgrade makes! We ran the LX2 through the Pop Photo Lab, and the results show that Panasonic has made a breakthrough in image quality, thanks to its new Venus Engine III processor and smart noise-reduction technology.
Combined with the excellent resolution from the sensor (which beats most 8MP DSLRs at ISO 100 and 200) and its excellent color accuracy, the LX2 earned an Excellent rating for Image Quality at ISO 100, and Extremely High ratings from ISO 200 up to ISO 800. Its noise levels peak at ISO 200 (Moderately Low) and drop to Low at ISO 400 and ISO 800, rising back to Moderately Low at ISO 1600.
Obviously, noise reduction kicks in at ISO 400 and higher, with a trade-off in resolution -- at ISO 800 the resolution is on par with a 6MP camera, and at ISO 1600, a 5MP. But you get to choose how much resolution to give up by setting NR at High, Standard, or Low. (Our tests were done at Standard.) Want more detail? Dial in less noise reduction. Don't plan to make big prints? Give up some detail, but banish noise with more NR. Frankly, we were impressed by the results at the Standard NR level and can't see a reason why you'd dial in higher NR -- only lower to improve sharpness.
Also, to get the highest color accuracy, we had to turn the default saturation and contrast controls down to their lowest settings (it's easy in the menus).
The flash is a bit weak and limited in range (just over 6 feet) at ISO 100, though it has an extended range at higher ISOs, as well as some useful features. These include a slow-sync mode for low-light shooting (which works well with image stabilization), quick access to flash EV compensation control, and fill-flash capability up to 1/2000 sec shutter speed.