Nikon's new D40 digital SLR, just announced, is smaller and less capable than the D50 I own and the D80 (or older D70s) and D200 higher up the chain, but for $600 USD including the lens, it is likely to blow away comparably priced all-in-one "prosumer" digicams.
When I was looking for a new camera this summer, I considered some of the all-in-one models from Canon, Panasonic, and others, but in the end my collection of old Nikon-mount lenses from my film SLR days and the already low price of the body-only D50 tipped the balance for the DSLR. This new model would be an even easier choice (though I'd probably still go for the D50 personally).
If you've been looking at spending $500-600 on a capable digital camera, you should check out the D40, as well as competing, slightly more expensive models from Canon and Pentax. While they lack movie modes and rotating LCD screens, and while you must look through the viewfinder in the old-style way to use them, digital SLRs generally take way better pictures in a wider range of conditions than most non-SLR models.