the xsi takes a lot of the features the 40d has and put it into the rebel series.
the main difference between the xti and xsi is as follows:
-First of all about $300 difference. a XTi  kit can be found for under $600, while the XSi kit is about $900
-12mpx over 10mpx(you wont be able to tell, although there is less noise at higher ISOs witht he xsi)
- the XSi uses SD rather than the more popular and less expensive CF.
-LiveView, although this is rather useless
-3" LCD over the 2.5", same resolution though
-DIGIC III processor - can handle 14bit and i believe slightly faster AF
-The XSi kit lens had IS (image stablilzer) although many people criticize kit lens as bieng low in quality what do you expect out of $200-300 lens.
If you are in the market for the XSi i would pay a little more and get a 40D that can be bought 1,130 with canon insant rebates special going on right now
I went with the XTi route last month and take that money and invest into a better lens although I'm probably going to pick up a 40D sometime this week hopefully.