The following will all work for portraits: 35 f2, 50 f1.8, 50 f1.4, 85 f1.8, 100 f2.8 Macro and the Tamron 90 f2.8 macro.
The 50 f1.8 is a no brainer as it's under a $100. I also own the 35 f2 which is a bit sharper then the 2 50's and the Tamron which has excellent BG blur (bokeh) because of it's 9 blade aperture. the Canon 100 macro is also considered a very good portrait lens. As far as zooms go the Canon 17-55, Tamron 17-50 both are considered very good.
You won't get a 40D for $600 without paying too much for something else (lens, warranty etc) I've heard of people getting pretty amazing prices from Dell when that have special sales in conjunction with coupons but other then that realistically you're looking at prices in the B&H range as Scott pointed out. There are currently quite a few coming up for sale on the Fred Miranda buy & sell forum as well.