I'm not too worried one way or another about the features of the sword, it's a decent weapon and it's part of Xan's story to me, so he'll wield the blade regardless of what it's features are. That said I had a look at the Moonblades, and there are a few things that jump out at me:
Idea 1. Since the sword is sentient it could withhold some of it's own powers, until it has better judged Xan. He was found worthy of wielding the blade, but some of it's powers were left dormant so the blade could watch and observe. Xan hasn't disgraced himself, but he hasn't really distinguished himself (after all he claimed the blade at a very, very young age); Xan has not lived up to the potential the blade saw in him when it selected him as a youth. The upgrade could be in response to him doing something heroic or noble in a quest. I don't care so much for this idea because I like the idea of Xan's enchanter abilities having a role in the upgrade.
Idea 2. Perhaps the blade laid dormant in the past for a time, and Xan's father was the first in some time to awaken the blade (or his grandfather). The blade only has a few powers because when it was reawakened not all of it's abilities came back. During the long dormant period some of them became "severed" from the blade as a whole and remained dormant when the blade was claimed by the father and later Xan. The item found as part of a quest could be used by Xan (after much study, careful research, and perhaps another quest and only at the appropriate level) to try to reforge the connection to these dormant powers (the success or failure of which could also be based on how the friendship/romance paths have proceeded). This could also entail him also needing to claim the blade a second time after he affects the repairs (which require that it be done at a specific spot and should cost some XP; IIRC, claiming a Moonblade costs XP, tough I didn't see that in Elves of Evermeet). Between the time that he repairs the blade and reclaims it, he could be left without the blade and if the PC doesn't take him to the proper location for the ritual he should leave the party (if reclaiming were necessary). If you thought having to claim it again was appropriate I'd think the Temple where the PC exits the Underdark would be a fitting location if you wanted to make it location dependent in SoA.
About the powers: I'm not much of a power gamer so I'm not too worried about this. If you went with something like idea 1 you could get away with just a bit of improvement and you could have the sword improve small gains several times. The second idea would, by necessity only occur once, and it's a lot more difficult to accomplish so a bit stronger version of the sword seems reasonable (you could also upgrade the sword based upon Xan's class; but that makes the swords back-story a bit less well defined, since the powers are supposed to reflect the previous wielders). For the first idea I would think making it a +4 (late SoA?) and then maybe a +5 (early/mid ToB?)weapon and perhaps one other power with the second upgrade would be acceptable. For the second idea, supposing the upgrade was a challenge and not just an event, I'd say consider a list of the swords previous owners (with knowledge of their class at least) and make a suitable list of powers from the sources; the following look quite doable:
Elfshadow (basically a long lasting simulacrum, technically it shouldn't have been level drained; this may be too powerful)
Danger Sense (as the cleric spell find trap; nifty, but not powerful)
make it a +4 or +5 weapon (this would really help the F/M version of Xan, but does little for the Enchanter version)
Dreamwarning (it occurs to me that you could give the blade this power already; Xan seems to know a bit about the future, this could be the reason why; a few lines of explanation and maybe a story element comment here or there as the PC progresses through the game and it would be done)
Human Influence (as the ring of the same name; non-combat not too great by the time you get it, but a boost none-the-less; personally I perfer non-combat abilities)
Spell Turning (as the spell of the same name; perhaps boost the number of levels it can take as per the staff of the Magi; perhaps too powerful)
Luck (as the spell; perhaps a longer duration; it may be a bit powerful to make it a constant effect)
Opening (as the spell knock; this one is pretty poor even as non-combat bonuses go)
Blasting (as the horn; pretty good, but not terrific by the time you get it)
Fear (a favorite spell of mine; but not too great when you get it)
Dancing (IIRC there is a unique sword in the game already that has this ability, it's basically like the Mordekain's Sword)
Flame Tongue (as the sword; I don't care for this one)
Wounding (as the darts; powerful but seems not too appropriate for a Moonblade though it's on the list)
Vorpal (as a couple of weapons in the game; again not fond of it on a Moonbalde)
Warning (this one looks tough; basically it should work like detection spells but just return species and number; I don't know coding for IE at all so I don't know much about the prospects of an ability like this)
Throwing (this one would make the blade very, very good; basically a big throwing dagger like Firetooth; not sure if the graphics will work out for an ability like this; from an objective standpoint this is the most powerful ability on the list for the non-F/M Xan besides Elfshadow)
Sharpness (I can't remember what this does in 2ed, probably should allow for criticals on rolling both a 19 and 20 instead of just 20; not sure about the feasibility in IE).
Sorry for the really long post,
-Starcrunch