imo just grab 4gb ram, and a 32 bit OS, vista
4gb costs $100 AU, not much more than 3gb.
cpu finem motherboard fine
suggest stretching your budget and grabbing a 9600GT, cheaper than the 8800gt 512 mb, at around $170, but still great performance.
as for your questions,
i would take a 32 bit OS - 64 bit has and still will haev driver issues and 3rd party support problems
i prefer vista, although it did take me 4 formats 2 get my new PC working how i liked it.
and yes u can run 32bit apps on 64bit OS, but there may be driver support problems.