The new Canon G10 camera is getting very good reviews, especially on features and image quality.
It is still weak though in the areas where compact cameras are usually weak: operating speed (autofocus speed and pics per second), and low-light capability. It does have a good stabilization which helps in low light, but noise increases rapidly if one goes above 200 ISO or so.
I wonder if they would be able, with current technology, to build a camera this size (it does need a jacket pocket after all, it's no super-compact), and yet make it faster and give it a significantly larger sensor? I hope so. I dont' see why not. But on the other hand, if it was easy, I'm sure they would have.
I don't see why camera companies couldn't do what you suggest, and more. The question is why they would. Is there a legitimate, profitable market with this type of camera, or is it more speculation on their part still that there might be in the future if they keep developing? Or more cynically, are they holding back on innovation at this price point because they're going to make more of their R&D money back at a higher price point, and just let the tech benefits trickle down to this one after a few years? And would they want to undercut their big moneymakers by giving, say, Digic IV and an APS-C sensor, when they can still get by with less?
All good questions! :-)
I know that if it were me, I'd be worried about the future, since digicams every year are getting better, and even more, cheaper at a fantastic rate. Where does that leave their profits in a few years?