I used to have an XT and now have the 40D. I would say the most significant features are:


1. Larger viewfinder. ISO in viewfinder.


2. Faster frame rate, feels more responsive. For my work I find i usually have the camera set to 3fps - the shorter blackout time is nice.


3. Better autofocus. I could not use the outside sensors on the XT in low light, now I can.


4. Rear screen is nicer, RGB histogram ensures no clipped channels.


5. Custom settings on mode dial. I underestimated these - I love being able to snap the camera into a know state. No more wondering if the ISO was set back, etc. I have one for manual/flash, one for wide open aperture; medium ISO; high frame rate and another for mirror lockup.


6. Live view - great if you do macro on a tripod, otherwise not a big deal.


Bottom line is that the image quality difference isn't significant, but there are lots of features that help make the difference of getting the shot. Be prepared for a larger camera, though. Whether to upgrade body or lens is really based on what you aren't happy with in your photos. If you have purple fringing, can't keep up with focusing, or soft shots the lens is the way to go. The body will get you speed and ease of use - that can help get shots too.