If all his old parts are still near new he could sell them on ebay and make some of his money back.

As far as what would make the most difference, I think the biggest differences would come from new wheels, fork, and frame.
Wheels are rotational inertia, so their weight is amplified against you. "1 ounce off the wheels is worth 3 ounces off the frame" or something like that...
A good fork vs. a bad fork can change the way you ride, like dial up vs broadband.
a better frame can be lighter, fit you better, more forgiving, look better.. etc.

you didn't mention what brakes you have, or if you wanted to upgrade them, but good brakes are nice to have, some BB7's or hydros. I still run V's but may be upgrading to BB7's soon.

those are my arguments for upgrading. I must add $0.02 against it too. 1) its cheaper to get a new bike 2) the "differences" you will get from upgrading your "transmission" parts might not be as big as you expect. (fork/brakes/frame/wheels might have much bigger impact on performance)
3) my bike is all Deore or Acera and i pass people riding XTR all the time
4) i dunno if you are trying to lose weight or anything but my biggest performance increase came from losing 15lbs. (<-- can go up steep hills in 1 & 3rd gear barely tired vs going up the same hill in 1&1 gear and passing out at the top)

however, any part that breaks on my bike would probably quickly be replaced by XTR or X.0 or whatever is top of the line and on sale at the time.