As an owner and frequent user of both, here is my 2 cents. (I just used it and 580EX for Christmas Party Photos0
The 40D is a FAR SUPERIOR camera to the G9...period. I would not even attempt to argue this. They are a perfect DSLR to P&S camera combo imho. (as long as you want to stay in the world of Canon)
That being said, in good light, at ISOs under 200, with reasonable PP, it is almost impossible to tell the difference between 40D and G9 8x10 and under printed photos. Same goes for 800x600 web images as well.
The 40D is a full featured DSLR so I won't go into the plus/minus of it.
G9's biggest problem is people expect WAY more from it that it was designed for. (this is why I have a 40D). People forget that this is a P&S camera, albeit a high end expensive one. It still has the same ISO limitation as any P&S sensor does.
It is also WAY TOO MUCH camera for the "happy snappy" crowd. There are too many features, control options and menus. If you don't read and understand the manual you will get confused and have settings you don't want.
PROS:
It is much easier to carry and I carry it a lot more because of this.
It takes fantastic photos ISO 200 and under.
Decent lens range for size (24mm would have been better imho)
Very sharp at f2.8
Handles and feels like a 50's rangefinder
Full manual control (AV/TV/M)
Shoots RAW
Great battery life
Flash Shoe (works very well with 580EX)
Can mount lens adapters
Surprisingly decent for action photos (very little shutter lag)
IS works for a stop or two
Face Detection is nice for Auto Party Shots
CONS:
ISO400 is usable with PShop Noise reduction software
ISO800 is barely usable with above
ISO1600 IS A JOKE
Fat hands/fingers will have issues with buttions
Lens is 35mm equivalent (28 should have been minimum and 24 would have been nice. I would have given up 50mm on the top end for this)
12 meg pixel is too much (8-10 would be fine)
Controls are Canon Confusing (if you get the DSLR's you will get this)
RAWS require a good amount of PP to get the best out of the photo.
Week internal flash (but this is really no different that any P&S camera)
FINALLY:
I suggest you get the aftermarket grip and thumb rest. It makes all the difference.
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I also have the Canon S70 and would highly recommend this for those who want an even smaller P&S with 28mm and shoots RAW. They don't make them anymore, but they are still available on the secondary market for reasonable money.