Yeah, the sensor is smaller, but its CMOS instead of CCD, and probably had to be to work with the notably faster lens, given that they had to make the body slightly larger. The preliminary comparisons is that the jpegs from the smaller sensor are similar to those from the LX-5, maybe slightly better, not not significantly. But I've seen one piece of anecdotal evidence that the raw files may be significantly better, at least in terms of high ISO. I know some people find CMOS sensors to be noisier at low ISO than CCD, but I have yet to have a problem with the amount of noise in a low ISO shot, so I'm not concerned about that. I saw a processed raw file taken at ISO 3200 that looked a good deal better than the jpegs, so there's hope.
One other thing not mentioned is the additional control lever/rocker on the back of the body. It controls the ND filter and some of the focus functions, like AF spot position and, more important for me, the focus distance when using manual focus. Between that and the aperture ring on the lens, that means I'd almost never have to click between functions on the click wheel that Panasonic uses as its primary controller. That shouldn't be a big deal, but I used to get confused about which function I had the wheel set to control way too often with the LX5. With the LX7, it would always just be exposure compensation except when I specifically arm it to do something different, like change ISO, at which point it would automatically return to exposure comp. That's actually really big to me, probably a non-issue to a lot of folks, but that's the kind of thing that can make a camera far more enjoyable to use for me. So I remain cautiously interested even though I bought the RX100.
-Ray