This is a bit tricky actually...
Personally I'd upgrade the video card, but the problem is you won't get as much of a boost running, say, a GF6800 on Win98 as you would in 2k/XP.
If you'd asked a few years ago I'd have said get a GF4 Ti4x00, but it would be a bit wasteful now unless you can get one really cheap.
256MB of RAM is a bit on the low side for Win2k, and will probably chug a lot on XP also - I usually recommend anyone getting 2k or XP has at least 512MB RAM, if not more.
Some people can get away with less, (esp. if they have really good fast hard disks, only have 1 partition and one OS, and don't install/uninstall lots of stuff), but generally I find 2k and XP eat RAM like it's going out of fashion (And don't get me started on the stupid disk caching algorithms!).
Unless you're a pedantic bastard like me and go through the Windows Services killing all the ones that shouldn't even be running then OS RAM utilisation alone will hit around 200MB quite easily after a few minutes of 'normal use'.
So, IMHO, if you wanna upgrade Windows, I'd get some more RAM at the same time...