An insignificant 2MP step up (to 10 MP), an upgrade to nine-point AF sensor from the XT's 7-point, a new dust removal system, low-pass filter vibration and software based dust pattern removal (which you can do easily on Photoshop or other image software). You also get a larger 2.5" LCD monitor and the eye proximity sensor just below the viewfinder to turn this off when composing your shot.
This will not be worth selling the Rebel XT to get the XTi, but if this is your first D-SLR, then you have to decide whether this is something you really want. None of these upgrade features are essential in the sense that you won't get noticeable difference in the final photo image. These features are more for the manufacturer to advertise and compete with the features offered by other manufacturers. $200 can also buy you a tele lens or a camera flash, which can significantly improve your photography. If your budget is tight, use the $200 to get a tele lens or flash instead of getting more sugar coating on the camera body.
I am buying my first SLR camera, and am having trouble deciding between the XT and XTi. I know that the XTi is an improvement on the XT, but is it worth almost $200 more than the XT? (On Amazon, XT with lens kit is $565, and the XTi with lens kit is $713)
My main question is, is the XTi worth the extra $200?