What would be best for me? A cheaper DSLR or a good digital camera?

I have one Nikon film camera with 38-90mm zoom lense and a sony hc42 handycam (miniDV, 1 MP still). Now planning to by a digital still camera. I can afford around $500, but looking for a cheaper one. What should be best for me? A low end digital SLR (from Kodak etc) or a good digital camera (~5MP Nikon/Canon)? I use camera for my personal use (family foto, travel pic etc).

From an image quality standpoint- the better digicams are really quite close to a DSLR.
The industry is fiercely competitive these days, and the types of cameras seem to be narrowed down to:

Compact. Typically 3x zoom lenses and 6-10Mp. the best of the bunch are the canon SD700IS, SD800IS, Fuji F30, Panasonic FX series. Maybe the Sony N2- as it's got a cool touch screen. Personally- I like the Fuji F20 or F30 the best for it's unsurpassed low light/high ISO capability that rivals a DSLR.

SuperZoom. Typically 12x zoom cameras with really small sensors. The best are the Panasonic FZ50, FX30, FZ7, the Sony H2, H5, the Canon S3IS.. Great for getting close to the action, bird watching and general fun. A bit bulkier and not great in low light. Or- if you want better low light performance-the Fuji S6000/S6500fd and S9500.

As for entry level DSLRs. Canon, Nikon, Sony and Pentax all make excellent products. But- you'll definately be above $500 and even the small ones are a lot to lug around in comparison.

There are some better digicams, such as the Canon G7, but frankly, the image quality is so close- you're really paying for features more than image quality.

Realize that taking photos of small children, indoors- is possibly one of the most challenging things to photograph and where something like a $1200 Canon 30D (DSLR) which has excellent low light capability and shoots 5 fps might be worth the cost. Hmmm- you might need to spring another $500 for a great lens.

canons are really cheap i have the a230 and it onli cost me about 199 dollars

See if you can stretch it to the Nikon D40 SLR, you will be very pleased you did.

Fast Auto Focus
Genuine through the lens viewfinder
Upgradeable

I own Fuji S7000 and S9500 non-SLR and I much prefer my Nikon D50 and D80, they are worlds apart.

The Nikon D40 just came out and is around $599 in stores. I'm sure you can get it cheaper online. You can get a used Canon 300D which is an excellent camera and a great value now that the XT and XTi are out.