The EOS-40D is capable of producing excellent quality photos, especially with a high quality lens attached (read: not my 17-85 IS lens). The camera produces very smooth-looking (yet still sharp) photos, with pleasing color, and minimal purple fringing (this last one is really more of a lens issue, though).
Noise isn’t really noticeable until you get near ISO 1600, and even then, it’s more than manageable. Even the ISO 3200 is usable, especially if you do some cleanup work in software.
The camera does tend to underexpose a bit, most notably when the sun’s not out, so keep that in mind. Much to my surprise, the 40D has a slight redeye problem, probably due to its weak redeye reduction lamp.