D40! That makes sense.
"Outdoes" is still some ambiguous criteria. Virtually any point and shoot outdoes that camera in terms of size...
In terms of image quality, I honestly don't know, but I've heard great things about the Leica M9 (if you can afford it), some of the fixed-lens big sensor cameras (if you don't mind being stuck with one focal length), the Sony NEX, and the Canon S90 (the only true point and shoot of the bunch). The S90 makes the most sense, in some ways, since with the others the small size is cancelled out if you want to carry more than one lens (or one decent zoom lens) with you.
Unless you need shallow focus or great low light performance, the S90 should be as good as an older, low-end dSLR. If you're comparing stock lens against stock lens, it may be better in almost every way. Point and shoots are way underrated.