Yes, your graphics card is one step from adequate. I wouldn't call my 7600GT card excellent, just adequate with graphics settings wide open, 1200x1024 resolution. I did find with a 3200+ I was a bit processor bound and when upgrading to an Opteron 175 I gained about 5 fps. It is possible for 5 fps to make the difference between playability and no playability, but I don't think so in most cases. Surely it proves that in your case overclocking to destruction wouldn't improve your gameplay enough.
So they're right. GPU is your first step. That 8800GT is calling you, BUT its power demands will suck your computer down a black hole, guaranteed. Since you apparently have a home built computer to begin with, first things first. And numero uno is getting a mondo power supply in there that will handle the newer graphics cards. Then look at that motherboard and see if it has the PCIe slot or slots you'll need to plug the newer graphics cards into. If it does not, you're looking at new motherboard, CPU and memory.
So what order do you do this in? I'm going to assume that you can't afford to do it all at once. If the motherboard is willing, then the power supply should be the first purchase, if an investigation shows you need it. The EVGA website tells you exactly how many watts you need to pull this rabbit out of the hole. Yes, the power supply will leave you after step one with no improvement in performance, but it unlocks everything else.
If your motherboard isn't up to the job, then your first step will have to be a combo purchase of motherboard, CPU and memory. Go for at least 2 gb of memory. This will be your most expensive hit possible. But it will give you a performance improvement after step 1.
If your motherboard and power supply are in line it's time to look at graphics cards. I'll second the nomination of EVGA as a great company to deal with and top performing, reasonably priced products. If DX10 is important to you, you'll have to look at the 9000 series cards. If not, that 8800GT has a price that will probably make you smile.
As far as overclocking goes, I personally would only overclock if the components I'm overclocking are going to be replaced anyway and they are not sellable. That is the case with your 2700+ processor, so some informed experimenting with overclocking might be a fine idea here. Just know that even spectacular success isn't going to solve your problem. And as Webster says, significant overclocking without heroic liquid cooling measures costing hundreds of dollars always shortens the life of your equipment. It would be for educational experience only and may result in the destruction of a worthless CPU. That's the most fun kind of ecucation!
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