In what area of performance increase are you looking at?
I have a T61 which has done very well for me. One thing I like is the more square dimension of the display.
I upgraded by installing a 40gb Intel X25-V SSD, and the performance improvement was remarkable.
No doubt, adding ram will be good, particularly if you will be upgrading to W7-64 bit. Get the upgrade version, not oem. Upgrade gives you both 32 and 64 bit dvd's, MS support, and because it is considered retail, you can move it to another pc if you ever abandon the laptop. If you have a second pc that you want a W7 upgrade for, look for the family pack which gives you 3 licenses for about $135.
I don't think you can buy a 500gb ssd for $700. But, if you need 500gb capacity, look at the newly announced Seagate momentus XT hybrid drive. It includes a SSD cache that makes it quicker than any conventional hard drive.