Try this!

Red-eye is caused by the light from the flash reflecting from the back of the eye. There are several ways to eliminate or at least reduce the effect. One, as you've done, is to edit the photo after it's been taken. The red-eye reduction feature of the camera shines a light at the subject, causing the pupils to contract and thus reduce the reflection from the eyes.

A good way is to move the flash away from the camera. This causes the red reflection to go toward the flash, not the camera. Unfortunately, the D40x lacks the Commander mode to control remote flashes. Instead, you can use something like the SC-29 cord to move the flash away from the camera.

Another possibility to consider is to not use the flash at all. Bump up the ISO and see whether there's enough light for existing-light photography.

IC8001, STK392-560 seems defective, its convergence output IC.

As both the camera and the flash does not have red eye reduction facility, you can solve the problem by not using high speed film, i.e. not more then 100 ASA and avoid shooting in very low light.

Digital cameras rely on "white balance" to control total overall color accuracy as processed for the final image. Colors are greatly affected by light. For example, look at any wall in your home or office and you can easily see that shadows will make the color of the wall appear to be different shades. Sunlight has a very different effect on colors than incandescent light or florescent lights. Digital cameras start with white (the absence of color) to measure the effect of light and adjust the metering (measurement and accuracy) of all the other colors. Of course, white in a poorly lit room may appear gray or even yellow to some digital cameras. So how can you get accurate color? 1) Turn the Mode Dial to MANUAL MODE (Red camera icon with an "M") 2) Use the Arrow Down on the ENTER Button to select W/B (White Balance) 3) Press the center on the ENTER Button to select and adjust W/B (White Balance) 4) Use the Arrow Right (once), then Press and Hold the Arrow Down. Note: Continue to Press and Hold the Arrow Down. There will be a pause as you reach the bottom of the common preset conditions. Then a new "hidden" option will appear. 5) Once PRE SET appears, Press the center of the ENTER Button to select it. 6) A Special screen will appear. Point the camera direct at something WHITE, like a piece of paper, a white wall or a white shirt. Regardless of the lighting conditions, the camera will accept this "white object" as the new starting point "base of reference" or "True White". 7) Press the Shutter Button to program the new "True White" setting. 8) Press the center of the ENTER Button to accept and continue photography. These new settings will be saved as PRE SET True White conditions in Manual Photography Mode until you change the settings with another selection. This will not "go away" when the camera is turned off. These settings do not impact Auto Photography Mode.