I had the same decision and went with the XTi for the increased screen size and better AF system. the extra MP is good, but more of a "future proof" thing than any benefit now. (yes I know that in another 2 years any camera purchased now will be HORRIBLY out of date...)

before deciding on either, be sure to check them out in a store to see if you like the feel. they've got a small body, so if your hands are big they may be too small for you to use comfortably.

about lenses, the Canon consumer bodies have a 1.6x crop factor, so any focal length you have with a film lens will be multiplied by 1.6 when you put it on your rebel (or D20/30/etc). So your 35-135 will act like a 56-216mm lens. You might want to look into something like the 17-70 Sigma, 17-50mm Tamron or the 17-85 you mentioned instead of the 28-135 so you can get more wide-angle coverage.

oh yeah, and the 50mm 1.8 kicks ass. two big thumbs up for that little thing.