SSD won't help. My sig laptop is wicked fast at "50% CPU" (1.2ghz), but its noticably slower at 800mhz - in terms of switching tabs, windows, etc. 800mhz i3 is more like a 1.2ghz Core 2, which is well over a 1.6ghz Atom in terms of single-threaded performance. So, you could get an SSD, but it won't help much.
I put Peppermint Three OS on a Pentium M laptop w/ 1GB RAM, wicked fast. Uses about 200MB at startup, never topped 700MB (whereas I hit 1.5+ GB in XP doing the same stuff - yes, w/ page file). Run nLite on XP to slim it down, then install it. An inefficient OS will be a big tax on performance. Anyway, an N270 should easily do 480p Youtube. 720p is kind of sketch.. it *might* work. mPCIE HD decoder will give you better Youtube performance, but won't help much with Netflix until it's properly hardware accelerated (I haven't been following this much with Netflix, last I checked was ~ a year ago, *maybe* its HW accelerated now).
Easier/lazier (worse, but better than nothing) option than nLite is blackviper. http://www.blackviper.com/service-configurations/black-vipers-windows-xp-x86-32-bit-service-pack-3-service-configurations/
If you get close to 1GB of RAM usage now, I'd go with the 1.5GB. It'll help memory bandwidth (1st 1GB will be dual-channel; I'm assuming you have a single 1GB stick currently) ever so slightly as well.. which might help video playback.