Turned on my new Nikon S230 and started taking shots. I was disappointed with quality as all the shots were out of focus. Even with enough lights, flash on as well as VR on. Very disappointed.

1. Set the AF (focus) mode SPOT, if available.
2. If your camera has settings for (image) compression, set it to FINE.
3. Set the Image size to a (higher) wanted resolution.

It sounds like you might be too close to whatever it is you're trying to take a picture of. Each camera lens has a minimum focus distance listed on it that determines how close you can get to something and still take a picture. Page 45 of the XTi manual talks about minimum focusing distance and describes the camera's behavior.
It's also possible that there is not enough light for the lens to focus. In this situation you might have to flip the switch on the lens to manual focus to take your picture.
So, either try moving further away so the lens can focus or use the manual focus.
In case you are interested, here is a website that discusses the minimum focus distance. Even though the website talks about Nikon cameras you will still be able to use the information.
Also, on page 160 of the XTi manual there is a section titled "When Autofocus Fails" that will give you an idea of what your camera is doing.
Cheers and good luck. :)

The cc circuitry that controls the lens aperture and focus has malfunctioned, the repairs are not cost effective to fix. The only option is replacement "the cheaper way"

Turn of the high quality mode to low quality mode... pictures will be clearer.

did you ever figure out how to fix it because mine is doing it now

Are you pressing the shutter button half-way and allowing the camera to lock in the focus (you'll hear a beep) before pressing the rest of the way? Take a few test shots with the camera on a firm surface...are they better? That means you're moving the camera as you snap the picture.

It may be as simple as a wrong selection in your menu, check that it's not on 'Macro' as this will not focus normal distance. good luck

I tried performing a reset on one of our S230 cameras here in our shop. The default setting is 10 megapixels, so the image quality should be good. My test shot turned out fine. Check the front of your lens to ensure that it is not fingerprinted or otherwise dirty. If that doesn't appear to be the case, you just might have a "dud" of a camera. In that case, find your bill of sale and get it in for a warranty repair.

The letters you're referencing is the M/A (manual / auto) focus switch. The lens has this switch and operates in Auto Focus mode when set to "A" and manual focus mode when set to "M".

You have to manually focus on the subject when in letter "M". If you do not, the result will be out of focus. From your description, it sounds like the camera / lens combination is attempting to focus and operate the shutter in auto, and focusing in manual; but due to some type of damage resulting from possible mishandling, exposure to dust, dirt or even moisture is interfering with the successful completion of the process.

You could isolate the problem to determine if the cause is in the lens or camera by simply attaching the lens to another compatible Nikon camera or placing a different auto-focus lens on your D40. The problem will either stay with your D40 or follow the lens when attached to a different camera. It is also *possible* that due to numerous attempts of auto-focusing with your D40 & lens combination, that both the lens *and* the camera have been damaged. If the problem is severe enough, the problem in the failed device could cause failure in the otherwise normally working device, too.

You might be best served by contacting Nikon Service & Support below:

http://www.nikonusa.com/Service-And-Support/Service-And-Repair.page

You also said you lost your manual. You can download the manual for the D40 directly from Nikon in your choice of English, French or Spanish from the link below:

http://support.nikontech.com/app/answers/detail/a_id/14157/session/L3NpZC9YRTgxQVpKag%3D%3D/kw/D40%20manual/p/19%2C334/c/187/r_id/116678/sno/0

Good luck!

Depending on how long you have had the camera - Nikon may come up with a free solution. Contact Technical Support at Nikon. The auto focus is not functioning as it should. Do make sure you are not covering any 'Windows' on the front of the camera when taking, shots.