Good choice - if you can't get the money together for a D90 or at least D80, the D40 is probably the best choice. That was the basic problem I had.
Stick with either the basic kit lens (the 18-55mm), or the package kit of the 18-55 and 55-200, or the pseudo-kit lens of the 18-135mm (I don't the D40 every officially came with the 18-135 the D60 did, but lots of retailers make a custom package like that available for a decent price).
If you are going to do a lot of nature photography, the 55-200 is probably a good place to start. For most indoor and outdoor "portrait" type shots the 18-55 is fine for. The 18-135 is a nice "in between" length if you want a cheap(er) all in one lens.
As for flashes, the SB600 (as recommended) is probably the best value in terms of price for features. It's about $200. It does just about everything you could want a flash to do.
That said, take a look at the SB400. I just got one and it's fantastic with my D40. It's MUCH smaller and lighter than the SB600 and half the price. It has two main drawback. First, it only tilts up and down, not left and right. That's only a serious problem when shooting portrait oriented photos (taller rather than larger, meaning you're holding the camera sideways). You pretty much have to either turn the flash off, use it as a direct flash, or bounce off the wall. This is pretty much the same situation as the built in flash, so you don't LOSE anything, and you can still bounce of the wall (though that looks funny, imo).
The other main drawback of the SB400 compared to the SB600 is the lack of wireless controls. The SB600 (and 800) can control other flashes wirelessly - telling them when to fire, for how long and how bright, etc etc. It's really great and useful IF you are planning on using studio lights, or other external flashes in a "slave" mode.
If you're not going to do studio work with extra stand flashes, though, it's almost useless. If you are a person deciding between a D40 and 80, I'm betting you're not going to do studio work with extra flashes... Also, the major strength of the SB400 over the 600 and 800 is its size and weight. It's much smaller than the other flashes, and as a result it fits on the D40 much better imo. I can't imagine putting an even larger flash on my camera than this one.
BTW, here's a small example of why I love my SB400 (put this up for some family members who don't get the expensive photography hobby)...
http://infojunkie.net/flash/flash.html
[EDIT]
I wanted to address the comment on "growing out of the D40/60 series". I've only had mine for a few months now, but I can safely say I'm pretty sure I'll keep it for a couple years at least. The only reason I'd upgrade bodies is to add HD video, and I'll only do that once Nikon updates the D90 to something that can autofocus in video mode.
The only significant shortcoming the D40 has is the lens selection, and the only serious difference is in the fast primes, which is changing really quick here. Basically, if I had a D90, I would have bought the Nikkor 50mm f1.8 months ago - it's $110 and covers about half my shooting needs. The next best option on the D40 is the Sigma 50mm/f1.4 HSM and it's $385. A huge difference. BUT, the D40 is more than $275 less than the D90 (even when you compare D40 with lens to D90 body only) and that's probably still true even for D80's, so the D40 is still a better buy if you aren't looking at buying a ton of glass right away...
OK, that made my post super long - sorry!
[/EDIT]
Finally, just a note. Typing in all caps online is the equivalent of screaming. I don't think anyone else has mentioned it as the folks in the MR photography forum are super nice polite people. But, seriously, use the caps lock sparingly, OK?