The 35mm film format certainly does have some historical baggage that the digital transition might be a great opportunity to discard, and lens size reduction in particular will be a strong attraction even for moderately serious photographers: note for example, Michael R's decision against the 600mm lens partly due to its bulk.
On the other hand, drastically smaller sensor sizes run into some real "scaling problems", which is why I expect that nothing smaller than APS or maybe 4/3" format will catch on for the sort of photographers who want good manual image controls and a reasonable amount of quality, like nice sharp prints at up to 8"x10", or up US letter or A4 size in this inkjet era. Roughly, I am talking about the "consumer SLR and above" market.
My estimate now is that shrinkage by a linear factor of 1.5 is workable (e.g. Nikon DSLR's) but that a shrinkage factor of 1.9 (4/3" format) is at or beyond the limit. Maybe the size reduction will not be enough to be worth it and 4/3" will succeed only in high end "fixed lens" cameras like the Olympus E and Minolta 7 series, but I look forward to seeing experiments like those of Nikon, Kodak, Olympus and Fuji decide this in the market place.
The historical baggage includes the 35mm frame SHAPE: before digital, most serious photographers disparaged the 3:2 aspect ratio of 35mm, preferring squarer shapes like 5:4 or the 4:3 of 645 medium format (and of most digital cameras). Ironically, that same group is now the main one hanging onto 3:2, probably for the sake of backward compatability.
Film frame size also hit a lower limit due to resolution needs for standard enlargement sizes and the inertia of the well established 35mm lens market. Though emulsions are may now be good enough for many purposes at APS size, those emulsions and APS clearly arrived too late, relative to digital, to change mainstream film cameras designs.
A number of items do set a lower size for a "serious camera", though.
1. Camera size:
On one hand, I disagree with the claim that "real photographers WANT big, heavy, 35mm pro size cameras": many ACCEPT the size as the price of fast motor drives etc., while high end rangefinder camera users often mention their smaller size as an advantage.
On the other hand, down-sizing will reach a point where the extensive controls and usably large LCD's do not fit well, and so set a lower limit on serious camera sizes far bigger that a typical P&S digital. Looking at the high end fixed-lens digitals like the Olympus E and Minolta 7 series, they can still get distinctly smaller than 35mm though.
2. Selective depth of field (i.e. deliberately blurred backgrounds and foregrounds):
Smaller formats needs larger aperture ratios to achieve a given depth of field for the same angular field of view (they need the same aperture diameter at smaller focal length). Smaller formats do seem to make it easier to design lenses with larger maximum aperture ratios, but going to 4/3" format or below seems to require portrait lenses with f/1 or beyond, which sounds inherently difficult for lens design. Format shrinkage by factors of 1.5 (current Nikon DSLR's) should be able to handle DOF control though: for example a fast 50mm lens would probably do in place of an 80mm portrait lens. (Do any Nikon DSLR users care to comment?)
3. Pixel quantity and quality:
matching the quality of decent 8"x10" prints needs about 2000 pixels (or more) on the short edge of the frame, and reportedly at least 5 or 6 micron pixel size for adequate exposure latitude and noise levels, so there is a lower size limit, but it is distinctly smaller than 35mm: somewhere around 4/3" format in fact (13.5mm by 18mm). Even Canon D1s resolution of 2700 pixels on the short edge with 6 micron pixels would fit a "1.5 cropping factor" format.
4. Diffraction vs aberration trade offs; but the guidelines I have read suggest that the limits do not clash until one gets more than a factor of 2 smaller than 35mm format.