Don't forget to add the cost of the OS. He did mention moving to W7.

Not to mention one huge factor with Dell: I can finance it. Going DIY pretty much eliminates that option. Like Sielle mentioned, you also left out the cost of the OS, plus the case. The system may be more powerful (I wouldn't say much more powerful), but its cost is completely out of the range of the budget I already established.
Dell pre-builts aren't like HP or Compaq machines. Unless you get one of their slimline models, they can be upgraded with pretty much any off the shelf hardware. I've bought many Dell machines, like thousands of them (I used to run a corporate tech support department), and I can tell you from experience they are a piece of cake to upgrade.

Personally, for what it's worth, this is what I'd do as well.

And a case as well. That's another $100-200 in itself. Normally I'm an advocate for building computers rather than buying them prebuilt, but this one is actually a pretty good deal in terms of price/performance.
One thing I'd be a little concerned about, though, is what PSU they're sticking in the thing. If Dell is going bare-minimum on what it takes to to run that system then that could severely limit your upgrade options (especially for a GPU) unless you first shell out $150+ for a beefier PSU.
Also, to repeat what several others have said, don't waste any money on the X-Fi Xtreme Audio. It's not an actual X-Fi card, but basically just a relabeled Soundblaster Live.

For audio get these:
http://www.amazon.com/Sennheiser-PX-100-Collapsible-Headphones/dp/B000089GN3
http://www.headphone.com/headphones/sennheiser-px-100.php
Don't be fooled by the price or size. They sound amazing. :)

[url=lhttp://support.creative.com/Products/ProductDetails.aspx?catID=1&subCatID=205&prodID=10365&prodName=Audigy%20LS%20(SE)&subCatName=Audigy&CatName=Sound+Blaster]This support article at creative[/url] looks like they actually DO still support it. I'd at least give it a try. If it works - some money saved.

I would at least consider replacing the PSU. Or requesting an upgrade to a named one if available. The PSUs of prebuilt systems are almost never very good and could damage components.
When you've got a gaming machine that's drawing a lot of power you're going to need a reliable unit.
I also second upgrading the graphics card. The 240 is nothing more than a rebranded 8000 series card. Spending a bit more on the 260 will get you a card that is actually (fairly) new and powerful.

I found out from Dell that the PSU is a pitiful 350W, which is certainly not enough for any after-market upgrade I might get. Fortunately, I do have an extra PSU or two lying around and at least one of them is a 500W and another is a 600W, so I should be OK.
The information I got was that the 240 was basically a re-branded 9800GT, of course now I come to find out that the 9800GT was just a re-branded 8800GT. From what I have read, it appears that the only major differences from the 9800GT is a smaller form factor, greater energy efficiency (perhaps why they went with the 350W PSU) and a faster clock speed (675MHz as opposed to 600MHz). Looking at the specs for the 260, it really doesn't appear to be all that much better than the 240. It actually has a lower core clock speed (575MHz) a lower shader clock speed (1242Mhz as compared to 1620MHz) but a higher memory clock (1998MHz as compared to 1100Mhz). Where the 260 shines in GFLOPS, it trounces the 240's 544 with a respectable 800.
However, all those numbers are just gibberish when it comes to what matters: will it make my games look pretty? I'm currently running a budget 7600GS 256MB. The newest game I own is probably The Witcher, followed closely by BioShock. If I get this new PC, the newest game I will probably buy within the next year that doesn't come from GOG will be Mass Effect (the first one, not 2). So, do I really need the 260 to play any of those games, or is the 240 sufficient? At the moment, I am still leaning towards the 240:
* It certainly exceeds the requirements for my current game library and any near future additions I may have
* It is $100 cheaper than the 260
* The 260 appears to be little more than an incremental upgrade from the 240, rather than a generational upgrade that you would expect, considering the 240 is just re-branded older hardware
* If I can stretch the 240 for at least a year, then the $100 I saved by going with the 240 can be applied to a 300 series card after they start to come down in price, which would hopefully mean a true generational upgrade

In practical tests, the 260 trounces the 240. That's where you get to see how much difference it would make to your games. The specs mean less and less with each passing generation.
For instance, you wouldn't take a 3Ghz quad core to mean that you've got a 12Ghz processor, would you? Equally, you wouldn't assume that a Core 2 Quad was equally as fast as a i7 quad core even if it claimed the same Ghz on the packaging.
If you treat the 240 as a 'just for now' card then it should be fine. Mass Effect is a 2007 game so it should run on a 2007 card, which to all intents and purposes the 240 is.

Do you know if those performance tests were done with the original 240 or the OEM version 240? There are significant hardware differences between the two, enough to cause significant differences in the performance:
Original 240:
40nm fabrication
512 or 1024MB VRAM
550MHz core clock
1340MHz shader clock
3600MHz or 1800MHz memory clock (depends on VRAM amount)
385 GFLOPS
OEM 240 (Dell version):
55nm fabrication
1024MB VRAM
675Mhz core clock
1620MHz shader clock
1100Mhz memory clock
544 GFLOPS
They might as well be completely different hardware with the same name. Even with the near meaninglessness of hardware specs, they should perform very differently.

Yea if Mass effect is going to be the most graphically intense new game you are planning to buy before upgading again to a 300 series card get the 240.

That's one seriously pimped out 240! No, the tests were just on the standard issue 240. Not that one. Like I said, it's not exactly future-proofed, but it should last you a year or two (depending on what you need out of it) and, with the right PC behind it, should be able to get the most out of even games like Crysis Warhead.

While it's quite true that the 240 is just a re-branded 9800 with a few minor improvements, which is really just an 8800 with a few minor improvements, it should be kept in mind that the 8800 was actually a damn good card when it came out and still does quite well even with recent games (I've been using an 8800GT for the past 2 years and haven't yet encountered a game that it couldn't run easily with high graphics settings, and my list of games does include Mass Effect). Based on this I'd guess that the 240, even though trounced by the 260, would be able to satisfy your gaming needs for a year without any difficulty.

One thing you should know about Dell, they use the weakest power supplies they can find. I bet that rig has a 350w. Which could be an issue if you want to upgrade your gpu in the future.