I started reading your post and for a second almost thought that I wrote it. I am in the exact same situation except that I acquired my Rebel Xs in January '09, only have one little kid running around, and also have the cheap Canon 70-300 zoom (it was $30 extra when I bought the Xs because of rebates). I also feel that I am limited by the Xs for shots of my child, so I've been looking at the same two models you are describing.
I plan on keeping my next DSLR for at least 4 years, barring breakage. My big concern is that both models are getting old. They'll still take great photos in years to come, but if Canon announces a new DSLR in a week, that could change the game slightly for me. It's psychological, but I can't shake it; I like to think my money was well spent. But that's me.
Many of my thoughts and observations have been captured by others, so I'll only add commentary I haven't seen presented yet.
Do you feel like the 3.7 fps on the Xs is too slow? The 5DII won't be much faster. Advantage: 7D. Also, the 7D has a newer autofocus system with more points and crosstype sensors. I would love to hear from someone who has used both cameras to shoot action in low light as to whether there is a difference.
Also, if you like the range of the kit lens and go with the 5DII, your 18-55 won't work so you'll need to find something in the ~28-90 range to be equivalent, which doesn't exist. But there is the 24-105, 24-70, and if you can find one the 28-80. Either way, it will cost quite a bit, even if you go with third party manufacturers.
If you go to Flickr you can download full res photos of any camera body and lens combo you want.* Pixel peep, print them out, and judge for yourself the IQ at various ISOs. Obviously this is dependent on the skill of the photographer and subject matter, but if you priorize the best images you can see what a body and lens are capable of.
I also analyzed the metadata of all my keeper photos over the years to see how often I use which lenses, at which apertures, shutter speeds, and ISOs rather than just what I think I use the most. It made me realize that I use the 18-55 a lot more than I thought (and almost evenly throughout the full range), I shoot at ISO 800+ than I thought, and it confirmed my suspicion that I almost always shoot wide open. Consider doing this if you can; it took me about 40 minutes to find and download a program, import all the data into Excel, and run the analysis. It was worth it.
You can sell the Xs on eBay for more than $300 with kit lens. That could be >75% of what you paid for it, which would put your cost of ownership at less than $2 per month. I'd say that's worth it. You can also put that money towards a new body or lens.
Lastly, and I may get flamed for this, you could easily switch to another camera manufacturer. You have little money invested in your system and can easily recoup most of the cost, as I mentioned. I have been looking at another manufacturer, which complicates the problem for me, so maybe you should stick with Canon.
Best of luck with whatever decision you make, and I hope these thoughts help more than hinder your decision.
*There might be an easier way, or a better site for this, but at Flickr I search for a group named after the lens I am interested in, then search within that group for photos shot with the camera I am interested in. It takes a bit of browsing to find members who post full res images, but it's possible to find photos shot with almost any body + lens combo.
