The '04 Xterra seats do not fold totally flat. The bottom cushions come out completely and then the back of the seat flops forward, but it has a bit of an angle even then. Anything can be removed with the right tools, but removing the seatbacks will leave the opposite problem; the cargo area will drop down where the seats are. If you don't have a need for the rear seats though you could always build (or have built) some sort of custom floor that extends the cargo area forward. There will still be a very slight "hump" there where it meets, but it could be pretty flat if done right. That is something I considered at one time, but everytime I'd think about it I would need the back seat!
The '05 Xterra (available probably in February) will have proper folding seats. The seat bottom will tip forward and then the back of the seat will flop down behind it. It will be a flatter fold, but I'm not sure that it's perfectly flat. THe '05 will also have a rubbery floor with moveable "utili-track" tie downs. It will be easier to clean, but your dogs will probably slide around on it. The rear seat and cargo room will be slightly increased. Not much else I know about that until we see the production version.
Best thing I can suggest is that you go look at one and have the dealer show you how the rear seat works. It's kind of clunky, but it "works."