So I'd say go for the video card upgrade now. You're going to get the biggest improvement by going that route. At some point, consider upgrading the CPU. If it were me, I'd wait until you can get a good price on an 8 series part and need to upgrade the GPU a second time.
120gbs of memory isn't a lot, i'd suggest adding a terabyte of 7200 harddrive, its cheap and can act as a secondary drive. Otherwise, everything seems functional though the CPU and especially the GPU could both be substantially improved since you plan on gaming.