I was starting to consider painting the tank, fenders and frame so that the bike would look brand new. Then a client of mine showed me this awesome site called wrenchmonkees.com
These guys are restoring and modifying bikes the way I originally planned to for the XT 500. The idea is to clean everything, replace all worn, missing, and broken parts with new OEM or better parts. Use steel wool and sandpaper to remove all rust, then buff. That way the patina and pits gained over time will stand out against the brand new parts. I think its going to look really cool.