My suggestion, Canon G9 or G10, then buy an external Flash for bounce. It's will work very well in most situation, unless you want to get into DSLR Photography! Also, the G9/G10 Video feather should be enough for capturing video as well.
I am currently using a G9 setup doing most of the snap shots.
Well.. if you ever use flash on your point & shoot camera, you would probably found that no matter which model and brand, the flash light always tend to make the photo no longer very good. This would be one of my reasoning why the G9 or G10. Get external flash with it, then you will have a camera that can do much more.
As EL suggestes, G10 is your best choice .. ( too bad, price is up now .. no more $419 .. but $500 )
It offers great picture, easy to use, great movie mode ( can zoom while recording and quiet ) fast AF .. reasonable noise. Just it is a bit big ..
Of course, LX3 is a good choice too, I bought one after read some good review .. however .... few concern:
It is not that small as well, it may look smaller then G10, but way way way more thicker .. not a pocket size DC anyway. It takes good picture, almost as good as G10, however, you cannot zoom while recording movie. (which is important for shooting little baby)
Of course, if you want a cam recorder, that is a different story .. ^_^