If it fails while overclocked, that doesn't necessarily mean it's a heat issue. It could also just be, well, that it doesn't like running at those frequencies. (Happens when you overclock "too far". Palominos never had much overclocking headroom.) Normally I'd recommend bumping the voltage up a notch, but your temps are pretty borderline as it is.
Well, first things first. What happens if you select a 12.5x multiplier on that board? With a KG7 or similar board, it's definitely best to have a standard FSB (multiple of 33.3333...MHz) and the normal multiplier rather than a "weird" FSB with a higher multiplier. (Better for performance, as well, but in this case it won't matter all that much.)
Secondly, how hot does the base of the Volcano 7 feel in operation? That's not a bad heatsink, and it should be keeping temps lower than that, so either the sensor's misreading or the thermal goop is of poor quality.
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