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I have both also. If you REALLY need the features of the 20D (that the XT lacks) then I'd say go with the 20D. Otherwise, it would be wise to buy better glass as bodies will always be upgraded several times over before you invest in a better lens.
Also, I strongly feel the 20D will become obsolete soon when Canon announces it's replacement.
Things I don't like about the 20D (personal opinions):
No LCD on back - this is a real pain when the camera is up high on a tripod. You cannot see your settings. You have to either tilt the camera back to look at the top or look thru the viewfinder.
Small screen & tiny histogram - I expect this body (at it's price point) to have a larger preview screen & since I usually keep the histogram view up I would have really liked to have the histogram over the image in full screen.
As for the 17-85 - I'm not really happy w/ it at 17-20mm. The image sharpness over the outer 50% is very poor. However, I'm not shooting that much in that range. If I need to shoot that wide (rarely) I will grab the 10-22 in my bag.
My 3 most commonly used lenses: 10-22, 17-85, 70-300 IS.
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-JeffT
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