I have a Canon 30D that has spoiled me with quality photos. But I'm finding that I still desire to have a smaller camera to always carry around, especially with the family. I recently purchased a well-respected Panasonic P&S with a Leica lens and I could not live with the photos it made so I returned it. Even though I want a smaller camera I guess I still want the quality, or close to it.

Besides spending $5,000 on a Leica M8 are there any other recommendations? The other day I randomly picked up a Nikon D40. It is compact and light with the kit lens and even on sale now too for not much more than a good P&S. The similar Canon xti is too expensive. What about the Canon G7? Any others?

For this purpose I don't really need RAW; high quality JPGs should suffice. Flash not necessary either because I can't stand on-camera P&S flash.

If you like the size of the XTi and just want a small backup take a look at an XT - you can find refurbs on-line for under $400.... It's still a great camera and it will let you use your current lenses.
G7 gets good reviews but for a P&S I like something that fits in my pocket. I have a Panasonic with a "Leica" lens as well, it's a POS but it fits in a shirt pocket and works in a pinch. A lot of users have very good things to say about the Fuji F30/31 P&S cameras.
Personally if it can't fit in a pocket it might as well be a small DSLR (like an XT or an XTi).

you are shooting primes... so you might look at the Pentax... add one or two inexpensive primes and you have a great little camera.

While the G7 has been under fire for not having RAW or a flip out LCD screen like the old G6 it still is a very nice little camera. It's build quality is very good. It is a nice size to hold on to yet will still go into a jacket pocket. The G7 is very solid feeling. It is similar in build quality to your 30D which I think is saying something considering most point and shoots feel like cheap toys.

As far as picture quality goes... well as you know it is a small sensor digicam so it isn't up to the same quality as your 30D, but it is very good. ISO up to 400 is just fine. ISO 80 in the highest quality JPEG is pretty clean and DSLR like. You need to turn the sharpness down to the lowest setting to get the images to look more like your CMOS sensor 30D images. It seems all of these digicams use too much sharpening for my taste.

The G7 is my first point and shoot. I've shot with film and digital SLR's for many years so the biggest thing to get used to is the live LCD screen. The G7 does have an optical viewfinder which is usable, but it could be better. Like most people I wish the G7 had RAW. Blown highlights can be a pain at times, but the G7 has terrific controls for exposure compensation. There is a button or dial for most functions (even a wheel on the back like the Canon DSLR's) so you don't have to play around in the menus much once the camera is setup to your taste.

The Panasonic LX-2 with the 16:9 sensor is another interesting camera. The new (yet to be released) Sigma with the aps foveon sensor is another curiosity. Of course we can dream of the Leica M8 all we want, but it isn't a practical investment for me even if I had the money. I'm waiting for a 5D successor at this point.

Have a look at the new Sigma DP-1

Antony wrote:
Have a look at the new Sigma DP-1

I was going to suggest that but if the OP feels the Rebel XTi is too expensive the DP-1 may be way out (I'm assuming of course that the DP-1 ain't gonna come cheap).

Lumix with Leica

I would like to see how the Sigma DP-1 perform, but it may be too expensive for your budget (or it probably is...).. How about Pentax K100D plus 40mm pancake? Both have rebate now and that makes the combo cheaper than XTi,,, I think.