After browsing the forums for some time, I decided I would try to put together a mid-range gaming system. Here is what I got so far. I will probably order tomorrow pending approval from you guys.
 
CPU- Intel Core 2 Duo E8400 Wolfdale 3.0GHz 6MB L2 Cache LGA 775 (45nm)
 http://www.newegg.com/Product/Prod [...] 19-115-037
$199.99 + Free
 
GFX- MSI NX8800GTS 512M OC GeForce 8800GTS (G92) 512MB 256-bit GDDR3 PCI Express 2.0 x16
 http://www.newegg.com/Product/Prod [...] 6814127325
$224.99 + $7.59 - $30MIR
 
MEM-   G.SKILL 4GB (2 x 2GB) 240-Pin DDR2 SDRAM DDR2 800
 http://www.newegg.com/Product/Prod [...] 6820231122
$74.99 + Free
 
PSU-  PC Power & Cooling S610EPS EPS12V 610W
 http://www.newegg.com/Product/Prod [...] 5&Tpk=610w
$109.99 + Free
 
DVD- Samsung SH-S203N OEM
 http://www.newegg.com/Product/Prod [...] 2bSH-S203N
#30.99 + Free
 
OS-  Microsoft Windows XP Professional With SP2C - OEM
 http://www.newegg.com/Product/Prod [...] 6832116400
$139.99 + Free
 
$1092.26 Total.
 
My only concerns are that everything is compatible and fits in the case.  Also, is that the right OS to buy or should I get the Retail version? I still have to buy the monitor/keyboard/mouse/speakers. Any other suggestions/improvements are greatly appreciated.

Seem to be missing the case and the motherboard?

What are the uses of the pc? Is it going to be overclocked? How long will it be kept?
 
No, don't get XP PRO if you have XP Home/MCE. It's the same if you don't use the extra features particularly in system admin. If you have XP, get Vista. It will last a year or 2 before Windows 7 rolls out.

OEM Windows XP is good for that computer only. The retail version license can be transferred to a new computer. In other words you can transfer the operating system to a new computer.

looks great but yeah a mobo and case would help a little. Look at the gigabyte p35-ds3l and for a case maybe the antec 900 or 1200 or cm 590 or 690

OMG! I don't know why the case and mobo didn't come up...here they are:

Case- COOLER MASTER RC-690-KKN1-GP Black SECC
    http://www.newegg.com/Product/Prod [...] 6811119137
$84.99 + $21.76

MOBO- GIGABYTE GA-P35-DS3L LGA 775 Intel P35 ATX
    http://www.newegg.com/Product/Prod [...] 6813128059
$89.99 + $7.00

AND the HD got left off...

HDD-  Seagate Barracuda 7200.11 500GB 7200RPM 32MB Cache SATA
    http://www.newegg.com/Product/Prod [...] 6822148288
$99.99 + Free

Also this computer will be used mostly for gaming. I don't plan to overclock any time in the near future. I haven't used vista at all, and I hear it is very buggy and noncompatible with a lot of games. I'm open to getting it or XP. Which would you guys recommend for a gaming system? Also please specify XP pro, mce, home, OR Vista (different versions) Lastly, if i got Vista should I get the 64-bit one and get 4GB more memory?

If / when you decide to try your hand at a little overclocking the parts you picked will make that easy.
Everything you picked should easily fit in the 690 case - it's a good case.    CM RC-690 review
Also everything on your list should work well together - you made good choices.

XP vs Vista -  As far as I know none of the most popular games that ran on XP have any major problems with Vista.  By now all have been patched or drivers updated to counteract the majority of the initial problems.
Newer games that have DX10 features and for future DX10 games maybe the best reason to get Vista.
There are enough "Vista Tweak Guides & Tip" available on the web that getting Vista setup to run well is easier than ever.  The performance difference between XP and Vista (XP is better) isnt as much a factor in a powerful system like you're considering as in more marginal hardware (2-4 years old) where the 3-5% better XP performance can make a difference.  I have a XP/Vista dual boot option and it's been six months since I've used the XP boot for anything other than updates, maintenance and backups.  Im happy with Vista.  
If you choose to go with Vista - Vista Home Premium 64bit with SP1
 

Yes, XP is for when you already have a copy of it, since it's still good. If you're going to buy a new OS, make it 64bit Vista.

Thanks for the great advice guys! I'm ordering this system as we speak. One last question though. I am getting the Vista OS, should I go with 4 gigs or 8 gigs of memory?

Go with 4gig for now. But get 2x2 sticks to leave room for possible upgrade. I got 8gig, but as it is now, the extra ram gives you absolutly no advantage on normal applications.

Go with Vista Home Premium 32-bit & 4gigs of ram unless you want 8 gigs...

http://www.microsoft.com/windows/p [...] 64bit.mspx

The maximum memory for the GA-P35-DS3L is 8 GB.

No, don't get 32bit. Not if you need to buy a new OS and don't already have it. There's no sense wasting 0.5gb of ram for no benefits.

4GB to Vista is similar to getting 2GB for XP.  Its a "sweet spot" for all around good performance without being overkill.  
32 bit is easier to manage - 64 bit has some extra security options to deal with.

Actually.... I should have said 3GB to Vista is similar to getting 2GB for XP.
Almost no one around here is settling for 3GB with the current price of RAM.
But you will see more pre-built systems with 3GB these days.