I am shooting a 40d, with a 28-135, standard issue...
I have felt images are not consistently sharp. I have adjusted in camera sharpness, and it still seems soft to me. I thought i would upgrade the lens, and give it a try.
Hmm. My son has an xs, lets compare.
We make settings identical, shoot the same object from the same distance, and compare zoomed images in the view finder, and his is sharper, for sure.
Then, we swap lenses, and his is still sharper.
Is my camera in need of help? it really functions perfectly, but I am suspicious of image quality here.
I used to shoot a nikon coolpix 8800 which I think had consistently sharper images.
Help.

Whizkid is right and need to look into those things also but I have noted that you are comparing 40D with XS. Ithink XS is more towards novice users and sharpning is bit at higher level at default settings then 40D. Also review says that 18-55IS (I assume that is the kit lens for the XS) is sharper then 28-135.

All consumer digicams will anyway have high degree of shperning applied to while generating final JPG but you should be able to achieve the same or better sharpness using 40D (either by settings or by post processing).