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If you are seeing any difference whatsoever between compressed and uncompressed DNG files, then you have a hardware problem on your computer. The compression used by DNG is lossless. Lossless means you get bit for bit identical results.
If Thomas is right and he probably is. If there was this kind of problem
with converting to DNG we would have heard loads about it from users by now.
Can you try a different computer and see if you have the same problem. If
you don't then you know something is hinky with your system. Maybe bad ram
or something like that.
Thanks for the replies. I had indeed upgraded my computer's memory recently. Although A lot of my problem images were processed before that. I am now looking at the Shadow/Highlight tool as a possible source for the problem because that is the one thing all of the bad images have in common.
No memory problem can be the reason of such phenomenon. The method of compression makes the decoding process extremely dependent on the integrity of every and each bit. Random errors in the compressed bitstream would lead with high probability to totally unacceptable, even unrecognizable results, not to "artifacts".
The above is equally true re the native CR2 files as well (they are compressed using the same method), i.e. such an error would be noticable on the native raw images as well.
Most probably some of the options or adjustments are different in the raw conversion (16bit vs 8bit, JPEG quality,...).
Why don't you generate and compare TIFFs (lossless)? Loading them as layers in PS, with blending mode "difference" may reveal the differences (you may need to adjust the intensity of the difference).
It looks like I found the source of the noise/artifacts problem. It's the Highlight Tone Priority function on Canon's 40D. According to Canon it causes noise in the shadows to be "slightly more than usual". I don't know what the standard for "slightly more than usual" is, but I learned that any tonal adjustment will amplify it quickly to where it is unacceptably noticeable.
Sorry for getting everybody worked up about this.
Turning on HTP causes the camera to use one stop lower ISO than selected. Look at the displayed ISO number in the viewfinder and on the LCD carefully: select ISO 200, and turn on HTP, the ISO changes in 2oo (the letter "o" replaces number "0"), showing that the selected ISO is not the one actually applied.
That equals to an underexposure by one stop, and that is the cause of higher noise.
1. DPP increases the intensity automatically by 1 EV AND pulls down the highlights (this is the point of HTP),
2. the DNG converter converts HTP in +1 EV adjustment, which will be honoured by ACR, but the you need to adjust the highlights if you wish so, for example by Recovery.