The Sony DSC-T1 is the smallest 5 Megapixel camera in the world. It also has a 3x optical zoom, but the mechanics are on the inside of the camera. The display on the back is huge and the color quality is pretty great. Best of all, the software is incredibly fast, which means no waiting between snapping photos or during playback.
get the DSC-T1 for $499.95 at Amazon