I've got a contact on flickr that uses a Canon 1000D, the new "entry level" camera, and while it doesn't have the bells and whistles of the more expensive cameras, she still takes some of the most amazing photos I've ever seen.
I was told by a pro photographer mate, to spend as much as you can on a good lens, as cameras will come and go, but if you're carefull with them, a lens can last a lifetime.
Hence why I got my other half to rob a bank* and help me buy a 70-200mm ef f4 L IS USM lens. Though it's probably wasted on me.