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Compact System digital cameras boast the versatility and picture quality of a DSLR camera in the portable, lightweight body of a "point-and-shoot" compact. How are they so small? What are the benefits over digital SLR and compact cameras?

Compact System cameras offer the picture shooting quality and flexibility of a digital SLR (Single Lens Reflex), but are smaller and lighter, so they have the portability of a compact camera.
Sometimes known as "hybrid" cameras or "EVIL" cameras (Electronic Viewfinder, Interchangeable Lens), Compact System cameras are characterised by large image sensors, no mirror (see below), and interchangeable lenses. With an adapter you can use DSLR lenses on the smaller body of a Compact System camera. Many models use the same size and type of image sensor as a typical DSLR, which means better picture quality than a point-and-shoot, compact camera.
Some of the advantages of Compact System cameras for digital photography include:

To explain this, let's start with the viewfinder, which is the small window you look through to frame and focus your subject before taking the photo. Typically, compact cameras have a "through-the-camera" viewfinder, which is a hole cut through the camera body. This is usually positioned above or to the side of the lens, so it shows you approximately -- rather than precisely -- what you will capture in your photo.
On the other hand, SLR cameras -- both digital and traditional film ones -- have a "through-the-lens" (TTL) optical viewfinder. To see the exact image that will be photographed, light enters through the lens into a light box, reflects off a mirror and exits through the optical viewfinder. When a picture is taken, the mirror flips out of the way, and the light hits the imaging surface, either the digital sensor or film. This reflex mirror arrangement in SLR cameras, as well as the lenses -- especially wide angle lenses -- means the camera body has to be bigger and bulkier to accommodate them.
With a Compact System camera, you can see what the sensor sees on a digital display screen, known as an electronic viewfinder. By eliminating the SLR mirror and associated parts, the body of a Compact System camera can be made smaller, thinner and lighter. Even more so, considering that by placing the lens closer to the image sensor, smaller, lighter (and, as a result, cheaper) lenses can be used.
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