OK. First of all, if this is a gaming rig, it doesn't necesseraly means that it will be used only for games. Not at all. There's much more to a PC than just gaming. That means that console is not an option here.
Also it doesn't really matter what games they want to play since I, as a PC builder, should be able incorporate as vast a scope of games as I can. That's why I went with GeForce 8600GT. It's good 3D renderer ans supports DX10, should they want to upgrade to Vista somewhere along the way.
Also a 400 W PSU is already included with the tower. I figured it should be enough for such a PC, since I'm on a severe budget.
I think it may be worth thinking about what hardware can limit gameplay depending on the game: A graphic-intensive game like Crysis may well require the video card be of a high end while a real-time strategy game may throttle the CPU more where a user may want a quad-core processor to provide extra horse power. Another question is whether one would overclock the system to try to get more performance from the components which while dangerous is a way to try to get more bang for the buck. Just a couple thoughts.
JB
I am assuming that since it is an "upgrade" that you plan on using the hard drive, optical drive, OS, mouse, keyboard, monitor, etc from the old computer. If not, then your list is missing a few items!
heres a better one for $500 after $90 mail in and $35 combo savings and then theres shipping, but its much better
http://www.newegg.com/product/product.asp?item=N82E16811156090
http://www.newegg.com/product/product.aspx?item=N82E16813135069
http://www.newegg.com/product/product.aspx?item=N82E16814130291
http://www.newegg.com/product/product.aspx?item=N82E16817152033
http://www.newegg.com/product/product.aspx?item=N82E16819103194
http://www.newegg.com/product/product.aspx?item=N82E16820141300