Do we need to upgrade camera or looking for better lens?

People who are shooting with a Nikon D40 with a Nikkor16-85 & 70-300, happy with this set up but they thinking of upgrading with a limited budget. Right now they are not sure whether it makes more sense to get a better camera, probably the new Nikon D7000 or a better lens, probably the Nikon 70-200 (a real stretch). Nikon D40 owners pretty happy with the D40, really wanting only for higher ISO. Both lenses are pretty good, they try to use them in their sweet spot as much as possible. The combination of smaller aperture (sweet spots) and lower ISO does cost some shots. They mostly enjoy wildlife and nature shots with some landscape, and of course the family/holiday/event photography.

Is it a waste of lens capability to use a Nikkor70-200 on a Nikon D40? Does anyone out there use this combo. How are the results, are you getting your moneys worth out this lens with the Nikon D40. The Nikon D7000 hasn't been out too long, but some reviewers are saying the new sensor needs better glass to take advantage of its capability. Are my lenses up to snuff for use with this camera? Anyone use this combo?

Professional’s current thinking is that since the next purchase after this one won't be for quite a while, the lens purchase makes more sense since it has more longevity than a body. The Nikkor70-200 probably won't be improved upon for several years, while the Nikon D8000 will probably be out within 18 months.

It is possible, if you are good at photography to get 20 inch wide prints (sometimes bigger) from your lenses at f8-f11 - though for very detailed subjects your camera sensor is a little limited. Many also overlook that image resolution is part made up of sensor resolution and part made up lens resolution - improve either and you get better quality. 

Either the Nikon D3100 or the Nikon D7000 will give you potentially more quality than your present body - but you are not going to see it unless you print quite a bit bigger than 10x8 inches. 

The Nikkor70-200 may give you a little bit more quality at f8-11. Where it scores is better quality at f2.8-5.6, faster AF, more depth of field options, and better build quality.

Better lenses combined with a better body gets best quality. Right now a good photographer would get a Nikon D3100 or D7000 and think about the Nikkor70-200 later as you are not into pro sports photography in a big way.