Ram first. The 40GB hdd will be good for now, unless you dont want to reinstall windows again when you get the new drive.
wow $60 thats bloody amazing!
You can upgrade CPUs in laptops too, It depends on the socket type. If its a socket A, the mobile socket A's are quite easy to come upon on ebay, but a 2800+ inst that bad at all, especialy for $60. you could get a 3000+ but that might run you a bit. I use a 2500+ SKT A in my desktop, its OCed to 2.1Ghz but its still not that terrible of a chip.
Does it have a DVD-RW? might want one of those if it doesnt.
Some of the new laptops you can upgrade video cards in such as the x1400 in my inspiron. I havent found any on the market yet though.