I am a big fan of Digital SLR cameras. These devices offer outstanding image quality and virtually instant autofocus and metering. The difference between these and point and shoot cameras is like night and day. The downside is that dSLRs tend to be large and bulky particularly if you have multiple lenses. Even an dSLR with one lense is typically bigger than a point and shoot. IMO, point and shoot cameras are valuable because they offer improved portability vs dSLRs. Historically, the downside has been image quality.
I recently ran across this article where the author compares the image quality between a $40,000 medium format camera and a $500 Canon Powershot G10. The results from the two cameras were surprising similar. A large group of photography professionals could not consistently differentiate between images taken from the two cameras! Yes, he essentially says that a $500 a picture that is difficult to differentiate from a $40k camera.
The differentiation between the above two cameras will vary by specific lighting and situation. In the case above, the performance was equivalent while there will be of other cases where there is no comparison. (It better be that way when spending 50x more!) That said, the fact the two cameras provide similar image quality in even one circumstance is amazing.
From my perspective, the Powershot G10 is the point and shoot camera to get if you are going to purchase one. It retails for $500 although you can use the Microsoft Live/eBay discount to save 30%.