I had this decision to make. I went with the D80. I compared the two and the XTi compares favorably but falls apart with some key issues like metering etc., the D40 is pretty well outclassed here despite having a few minor advantages.
However, the D80 incorporates everything good about the D40 along with all of the XTi's bell's and whistles like 12 point focus (as opposed 3 for the D40 and 9 for the XTi iirc) and some other neat features in addition to also just feeling better in the hand.
If you decide Nikon, get a used D70s. It has the superior meter of the D200 and it can take regular AF lenses (you will thank me when you purchase the really really sharp and awesome $100 50mm f/1.8D). At also has two more auto focus sensors.
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