That system should be fine for AH2 when it goes final I should think.
Back to your question though, the only real answer is both. Upgrading the video card with your current CPU would probably gain you some performance, but you'd certainly be bottlenecked by the CPU and system. If you upgraded the system and CPU and reused the GF3 Ti 500 you probably wouldn't gain as much performance in games, but the system would be faster overall. You also wouldn't be bottlenecked with newer cards.