The digital rebel xt is not within your price range if you want a very good lens. It is, however, a fantastic camera and probably the best value for what you get, and you can start small and get more lenses later. It is very very compact, which makes it much easier to carry around in a bag with other stuff. I have no complaints, and I like it much better than the digital rebel. Everything has a very fast response time, and it takes great pictures.

The kit lens that comes with it is "eh", although it's the cheapest way to get a decent wide angle due to the crop factor. Get it, and hold onto it until you feel like you want to shell out for the 17-40L f/4, which is downright stellar. I stick with Canon glass even though others are cheaper, because Canon makes very good lenses and they're totally free from compatibility problems that sometimes plague the third party ones. In my opinion, the best general walkaround lens is the 28-135 IS, which is a bit on the large side, but it's got a stabilizer, it's reasonably sharp, and it has a good range. It tends to run around $430. You should also pick up a 50mm 1.8, which is about $60 or so, and outstanding for the price.

Beware. Digital SLRs are money suckers. You'll consistently find new reasons why you absolutely need that brand new $700 lens or $400 flash or some new extender or reflector or something. Be prepared to look at a $1400 lens and think "oh, that's not that expensive given what I could do with it".

Feel free to ping me if you have other questions.

I've found that if you are willing to spend a little bit more ($1300), the Canon 20d is a fantastic camera. Make sure and get the 17-85 EF-S lens (as opposed to the 18-55 standard lens) as it has image stabilization features which help low light photography immensely. The 17-85 IS is also a great all around lens. Almost all of the photos on my site have been taken with this camera (and a number of different lenses). The color management on the 20d is good, it is much more ruggedly built than the 350D/Rebel, and the number of custom settings are most convenient.

I just got a Nikon L1. It is perfect, never a bad photo.

Two friends have (and love) the Nikon D50, which appears to be a newer (and cost friendlier) D70.

I echo the support of the Canon 20d. I absolutely love mine. Does everything you need and a lot of things you didn't know you needed.

I think the 20D is a mistake, unless you know you need the extra features (and if you're not shooting 8 hours a day every day, you probably don't need them). The pictures from the XT are nearly identical to those from the 20D - the lens you get is going to make a bigger difference in the quality of your images than the body at that point, and that $500 difference will go a long way towards getting you better glass to work with.

If you already had a large collection of lenses, or needed the very few extra features provided by the 20D, then my answer might be different. Since you're likely going to replace the body in 2-3 years anyway, it makes sense to start spending your cash on buying lenses that you need now and will be able to use with subsequent bodies in the future. Then when it comes time to upgrade, buy the more expensive body if you really want it, to use with your collection of better lenses.

On the Canon vs. Nikon question, it doesn't make too much difference when it comes to image quality. They're both about equivalent. Canon does have a huge advantage in controlling their entire end to end fabrication process (they make their own image processing chips and sensors; Nikon outsources theirs). This gives Canon a really big optimization path in trailblazing new features in forthcoming digital backs - they've been leading for a few years and their lead is only going to increase.

I also own a DRebel XT and enjoy it immensely. If you've got large hands and/or long fingers though, you may not enjoy it as much as it is quite small (as far as SLRs go). You may want to check out the Buy & Sell forum at fredmiranda.com cause I've seen relatively new XTs being listed for ~$700.

As for lenses, the 50mm f/1.8 is a no-brainer at its price point. Whether or not you go with the 17-85 or 28-135 is really up to your shooting style and if you prefer wide angle more than telezoom.

While it's ideal to stick with Canon lenses, your wallet may beg to differ in which case some third-party lenses from Sigma and Tamron (like the 24-70 f/2.8 or 28-75 f/2.8) have solid reputations as well. You may have to hunt a bit more for a sharp copy but the results can be quite comparable.