The 6 Megapixel Nikon D40 is targeted for those who want a relatively compact and light camera yet having most of the important SLR features. The D40 is priced reasonably (cheaper than D50/D80 and Canon Rebel XTi). In my opinion, if you are still considering whether to get a point and shoot camera or a DSLR, the D40 will be a better choice than any point and shoot camera, by far, even those with 8MP or 10MP. But if you are already deciding to get a DSLR or you want more control of the picture taking experience, then I would recommend you to also test the D50 and/or D80 first before deciding to buy the D40. I want you to make sure that you know what you will get (and not get) with the D40. Don't get me wrong though, the D40 is an awesome camera, and I don't think you will regret buying one. There are some limitation with the D40 which shouldn't bother most people, for example, the D40 doesn't have dedicated button to change picture quality, white balance or ISO settings (which generally only professional/enthusiast will care). Once you understand (and accept) its limitation, the D40 is a potent and exciting photography machine.
Just like all its (DSLR) siblings, the D40 powers on instantly and take pictures with almost no shutter lag which are the major advantages of a DSLR over a point and shoot camera. In addition to the P, S, A, M mode, the picture quality of the auto settings (auto, child mode, landscape etc) are also very good. With 2.5 frames per second you can capture movement progress in sports like football, basketball, baseball etc. Also great to photograph your family or child (child mode). The D40 is a great all around camera.
Some notable new features:
Auto (no flash) mode. Without this mode the flash will pop-up (on all other pre-programmed mode) even when you don't want to use flash (which can be annoying). The internal flash will not pop up automatically with the P, S, A, M settings.
In camera editing capability such as black and white, sepia and some filter effects etc. While sounds gimmicky, these features are useful especially for those who doesn't have Adobe Photoshop (or other image editing software).
To date, D40 is the smallest and lightest among all the Nikon DSLR (even smaller than the Canon Rebel XT/XTi, however the D40 is more ergonomics). I believe that choosing a camera that fits comfortably with your hands is important. Therefore, I recommend people to test the camera before buying (even if you want to buy online, please do go to a physical store and test the camera first whenever possible).
The D40 has only 3 (horizontal) autofocus point (5 for D50 and 11 for D80). If you know "The Rule of Thirds", the additional AF points above and below the center focus point (available in D50 and D80) are handy to help create the horizontal third line. However, the 3 horizontal AF point in D40 is still helpful to create the vertical third line. Also one can focus with the middle AF point and after the focus is lock then move the frame upwards/downwards to create the horizontal third line. Just make sure the exposure level is still accurate when you move the frame after you lock the focus.
About the 18-55mm II AF-S kit lens: A good lens producing sharp photos (though not a very fast lens). Also decent for close-up/macro photography. Lens uses internal focus technology and focusing operation is silent. A very decent kit lens.
Lens compatibility: Notice that with D40, autofocus function will not work for non AF-S/AF-I lens. If you already have non AF-S/AF-I Nikon lenses and want a backup or replacement camera, you will be better off buying D50, D70s or D80. If you buy the D40, it will be convenient to stick with AF-S and AF-I type lenses. I'm not sure why Nikon choose this route for the D40 (whether to enable smaller size camera or from now on Nikon will only make AF-S lens compatible camera). There are a lot of good Nikon AF-S lenses (price range added: low, medium, high) that are fully compatible with the D40 such as:
