Jyjjy is exactly right. (thats probably why noone else jumped in here)
1. The e8400 is still an excellent gaming processor. (I also have it) If you look at toms gaming CPU hierarchy you will see that it still ranks near the top because of his high clock speed and somewhat muscular cache. It will not bottleneck most cards.
Overclocking can give you quite a bit of performance boost with an e8400. I regularly see reports of people clocking it well past 4 ghz.
Toms article on C2D overclocking: http://www.tomshardware.com/reviews/core-2-overclock,2316.html
2. If it were me, I wouldn't consider the 25%ish performance boost of a 5770 to be worth an extra $150.
I think the best options here are to
A) upgrade all the way to a 5850($300) for a large performance gain,
B) Wait for the 5830 to come out soon (a little over the $200 mark) and significantly more powerful than a 5770, or
C) Wait longer for Nvidia Fermi and/or AMD price drops. (you might overclock both CPU and GPU in the meantime)