I agree with the comments above. You only need more than 8MP if you're planning to submit to stock agencies or if you need to crop your images heavily. It's far more important to work out exactly how to use your 350D, which is a perfectly capable camera. Your images are soft almost certainly because your shutter speed is too slow and/or you're not holding the camera steady. Using some flash can help as it might allow a faster shutter speed but setting the flash exposure compensation (FEC) 2 stops down is simply turning down the intensity of the flash. This will actually lead to a slower shutter speed (compared to using flash without -2 stops FEC), so I'm a bit confused by this.
Lenses are far more important than the camera body, so I'd spend your money on those before buying a new body
Matt