Thanks to all who have responded!!
Finder preferences are set to show everything.
I am unable to reformat, erase, partition or anything else in Disk Utility. Everything is greyed out.
When I connect the 40D to my Air, iPhoto pops up and I am only able to download into iPhoto. This kinda defeats the purpose of having USB 3.0. Plus, my prefered workflow uses bridge and photoshop, not iPhoto.
At least I am encouraged that others are NOT having this issue. That means that it should work and therefore there should be a fix.
My next move is to make a Genius Bar appointment and see if they can help.