I went through the same thought process, 1.8TQS or S4. In the end I opted for the 1.8T as my upper limit was 300bhp and I'd rather have a 300bhp lighter, cheaper to insure and cheaper to fuel 1.8T than a 300bhp S4.
Mods wise, I had a similar budget when I bought mine. I ended up eating that up and more besides. As IN2Deep says, £2500 isn't a lot to get good power out of these cars. They are quite expensive to get big power out of as I'm finding out!
I agree with Oranoco, spend the money on a decent set of top brand tyres (if needed) suspension and brakes. I fitted the full Meyle arm kit (£380) and Weitec Ultra GT suspension (around £500) plus a full proper 4 wheel alignment (about £100) along with a set of Eagle F1s (£550) and the car is completely transformed.
Chances are the car is quite old and has done a fair few miles so the current suspension will be well past its best.
Brakes are the next step (what I'm looking at now). Have a look at my thread titled "Porsche brakes". Some good discussion in there and loads of tips on the options available for cheap money.
I'd probably suggest a good service next, unless the car has a really comprehensive service history. Do engine oil, gearbox and rear diff, plugs, airfilter, fuel filter. Pointless going for more power if these are fubar.
Next thing I'd do is get it chipped/remapped to around 200bhp (plenty of places do it) to keep within your budget. You could go for a K04 or other bigger turbo but by the time you've done intercooler, injectors etc etc you'll be well over your £2500.