Noise Filter and Sharpening
If there's one fault with the E-P3's JPEGs it's that the default level of noise reduction is rather strong, and can produce rather 'plasticky' images which lack texture and fine detail, especially at high ISO. These files should work pretty well for small prints, but viewed up-close on screen they can look rather over-processed and artificial.
If you don't like this you can, of course, tune your settings to your own personal taste. Noise reduction is, slightly counter-intuitively, set using the 'Noise Filter' control in the Custom G menu (the 'Noise Reduct' option is for long exposures), and you can turn this down to Low or Off to retain detail better. However if you do so, the default sharpening then somewhat accentuates the noise, so you may prefer to turn this down too (note though that sharpening is set individually for each Picture Mode). The examples below give an idea of what's possible.
Even at relatively low ISOs, the Noise Filter can be destructive of fine, low contrast detail (most notably hair), and its smoothing effect over even-toned areas can give a very strange appearance to skin. The example below illustrates this; even at ISO 500 the standard processing gives a very odd look to this portrait when viewed up-close on screen. Turning the noise filter off, and turning down the sharpening to match, results in a far better image for on-screen viewing.
Overall Image Quality/Specifics
On the whole, the E-P3 offers very good image quality in both JPEG and raw modes. In typical Olympus fashion it turns out well-exposed, attractive images with lovely colour rendition time after time. Overall its output is similar in this regard to previous PENs such as the E-PL2, and that's no bad thing at all.
The E-P3's metering is generally very reliable, which means that badly-blown highlights are relatively rare (of course you can easily keep an eye on this using either the live histogram or exposure warning display modes, and tweak the exposure compensation appropriately). White balance is also well-judged, and tends to err on the warm side rather than the cool - in fact the E-P3 is capable of making even the dullest of grey days look relatively cheerful.
We've long been big fans of Olympus's colour rendition, from either out-of-camera JPEGs or raw using the supplied conversion software. The E-P3 continues in this tradition, with the default Natural mode delivering attractive, saturated colours. However if you shoot in iAuto mode, the camera will use its i-Enhance picture mode that can look distinctly cartoonish - some users may well like this, but on the whole we're not too keen on it.
The one area where the E-P3 falls a little behind the competition, though, is in terms of high ISO noise; its 12Mp sensor is now distinctly lagging behind both the APS-C competition and the Panasonic G3's 16MP sensor in this regard. It still produces quite acceptable results up to about ISO3200, but going any higher becomes distinctly problematic (and ISO 12800 is so noisy as to be effectively unuseable). It's a pity that the E-P3 doesn't use the G3's sensor.
However it's worth bearing in mind that the E-P3's in-body image stabilisation can offset this to a degree; it allows you to shoot at slower shutter speeds and therefore lower ISOs than would otherwise be possible (as long as the subject isn't moving too fast, at which point blur can become a problem). And unlike other systems that rely on in-lens stabilization, it continues to work no matter what lens you're using.
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