You can get a smaller camera that will take arguably as good quality photos as your old Nikon, and some of those same smaller cameras have closed the gap considerably when it comes to focusing speed and shutter lag. But they won't be any cheaper than an entry level DSLR. Check out the Panasonic G3 or Olympus E-PL3. You may also want to have a look at the Sony NEX-5N.
I loved my Nikon D40x and was just about to get the d3100 or canon t2i. However, I realized that I never used any of the manual functions on the camera. I only cared about the photo quality and the fast shutter speed.

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