I have been asked this question a lot lately, so I thought I should do a post for anyone else who is thinking of taking the leap into the DSLR world and wants a little advice. I am by no means an expert, but I have been forced to do a lot of research on the market in order to make my own educated purchases. Also, beware that if you talk to me about this personally, I tend to turn into a MAJOR geek and mention technical things that you probably don't care about it. It just happens!
Okay, first question you should ask yourself is what do I plan on using my camera for and how often am I going to use it. If you plan on taking pictures when you are on vacation only or if you plan on shooting quite regularly, this will affect how much you should invest in your camera.
To make things easier, I would limit your choice to Canon or Nikon. Why? Because they have been around forever and aren't going anywhere. With other companies, there is always a worry that they are going to go out of business and leave you wanting to upgrade or buy a new lens and you would have to start all over.
The next decision is even harder, Canon or Nikon? This decision is really very personal. Both are amazing systems and people normally choose one or the other because they have existing lenses or friends or mentors that shoot with one or the other - really, you can't go wrong with either. I, personally, am a Canon girl, but that is because I always have been. Also, I shoot with prime lenses (lenses that don't zoom) and Canon has a much better selection of these types of lenses. For the sake of sticking to what I know, I am going to talk about Canon, but the Nikon pretty much has an equivalent for each of these cameras. Here is your lineup of contenders:
Digital Rebel XS (aka 1000D) 10 MP - $500 (with stock lens)
Digital Rebel XSi (aka 450D) 12.2 MP - $750 (camera body only for $529)
Digital Rebel T1i 15.1 MP - $750 (camera body only for $650) - has HD Video
50D (15.1 MP) - $1160 (camera body only $985)
7D (18.0 MP) -- $1900 (camera body only $1700) - NEW!
5D Mark II - $2700 - camera body only
1D Mark IV -- $5000 - camera body only (this is what we can dream about)
So you want to think about what you can afford. If money was no object, I would suggest the 50D. It has a higher ISO (ability to shoot in low light) and can take more frames per second. It is a great starter camera that is powerful, but not overwhelming. This is not to say the Rebel is not good, it is an excellent camera and if you are only planning on taking it out on vacations, by all means, this will do the trick.
Also, your camera is only as powerful as the lens you put on it. My suggestion would be to buy the right camera for your needs and splurge on the lens. I recommend not buying the kit lens with your camera. I bought a kit lens with my first DSLR and it has been safely tucked in a drawer since the day I bought it. I promise to post later about lenses!
For reviews of each camera and actual comparisons, I go to dpreview.com. He really breaks down the differences of each camera and gives great, detailed reviews.
Hope this helps. Leave me a comment if you have any other questions I can answer!
To brighten your Tuesday, here is a pic I took on the side of the road the other day (hey, when inspiration strikes!):

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Hi Julie! What exactly does DSLR stand for? ;o)
(11.03.09)Great tips on the DSLRs. I own a Nikon D40 and I love it.
(11.03.09)Hey Julie, don't discard Olympus out of the choices. Specially for those that just want to buy a DSLR for hobby purposes. Dpreview.com always gives Olympus great ratings and Olympus always packs a lot more features in their cameras for a lower price. For example, the entry level Canon Rebel XS, and the Nikon D40 don't have Live View, which the Olympus E420 has. Also the Olympus E520 (currently $450 @amazon w/ lens) has in-body image stabilization. You're gonna have to pay a lot more for that feature in Canon or Nikon. Olympus Zuiko lenses have also great reviews at dpreview and they cost a fraction of the price. Just my two cents.
(11.05.09)thank you for this post! hope your doing good :]
(11.09.09)Julie - super insight. Thanks a lot! Now I want to read about the lenses.....
(12.17.09)