First, I would like to make it clear that while you can update a home built computer, you usually end up finding out buying a new one is easier (assuming you current one is getting 2 years old). This is because the processors move to a different socket type, and to use the newest tech, your going to have to buy a new motherboard to get a new processor. Once you do that you might as well buy the faster RAM to go with it, and the cycle continues. Right now I have a processor that I pretty much can't update because they moved to a different socket and nothing is made for the old one. Mine is about 2 years old now. This isn't always the case, but for the most part the graphics card is the thing thats usually upgraded. This may change since AMD released socket AM2 and Intel has its socket for the core 2 duo line.
I've built several computers, but most have been for others on a tight budget, and I've only really built two really nice computers. But I pretty much order exclusively from Newegg because of their return policies and reliability. Also, its just easier for me to order the entire thing from them.
A big case can be nice, but they are also pretty heavy so if you ever plan on moving the comp around consider that. A huge case and watercooled system are going to keep you from going to LAN parties and can become a hassle if you switch residences often. I have never built a watercooled system, but I always wanted to. I looked into it and it just seemed to not be worth it. It keeps you from just picking up your case and moving it easily, and the leaking coolant worried me too. There are water additives and liquids you can buy that are non-conductive, but I've never seen them used. Also, it pretty much automatically adds 500 dollars to the computer at least. I would rather put that into hardware instead.
I'm not quite sure why you want to watercool, but its usually used to make quiet PCs and to cool an overclocked computer. You can get fairly silent operation by using large fans on the case, and replace the heatsink with one that has a larger fan. I also wouldn't recommend overclocking if this is your first built computer, but it can be done to a lesser extent with a nice heatsink and fans.
If you really want a big case I reccommend the Antec P182 (its on newegg) its huge, and has lots of large (quiet) fans that u can run at different speeds. It also has water cooling ports so you can use an external radiator tower if you want. This is something that sits outside of your case and is much bigger than a radiator that you could mount in a case (and it leaves the heat away from the case). Keep in mind once you have all your stuff in the case its weighs about 50 lbs. If you decide you don't want a huge case you might check out the shuttle xpc cases (their really small but still have nice cooling and variable fan speeds). I have the xpc sn25p right now (its old and outdated, but they have newer ones that use the core 2 duos). Also, if you want to replace the heatsink with a nicer one (not entirely necessary, but can make the fan more quiet and cool better) I would check out the Zalman brand. Remember, an OEM processor won't come with a heatsink, but a retail one does.
Some cases come with power supplies and some don't. I've never really had a problem with power supplies. Usually people buy more than what they would ever need (IE the 750W or 1000W power supplies). Right now I am running a 250gb hard drive, a nvidia geforce 7800GT, and a dual core AMD Athlon 3800+ with 2gb ram on a good quality 350W power supply. Now that being said, I probably wouldn't buy anything less than a 500W today especially if it came with the case (their usually lower quality).
If your a gamer your going to want a nice graphics card. I like Nvidia but I'm sure there are plenty that will tell you ATI is the only way. Basically when choosing one you set a budget, and then pick the one that fits that budget. You can look up reviews and see comparable cards and see how the one you picked faired. Then you end up going about 50 dollars overbudget to buy the next fastest graphics card.
When picking out a motherboard, you need to know what kind of graphics card your going to have, the processor socket type, and the type of ram. The easiest way I have found to do this is to choose the processor first. This will tell you the socket type to look for on the motherboard (I would use an intel core 2 duo). Graphics cards these days are almost always PCI express 16x. So now you can limit your selection of motherboards with these criteria (Newegg lets you select these under advanced search). Once you pick out a motherboard, you can select the ram that it supports.
Putting the computer together is pretty simple assuming nothings broken. You just set the motherboard into the case on risers (they are small little screws with a screw hole in the top to allow another screw to go in them, they come with the motherboard). Just make sure you don't put one where there isn't a hole in the motherboard for a screw. Then slip in the RAM and CPU in and then put the heatsink on. The heatsinks that come with the processors usually have thermal pads on them, but if not then you have to apply thermal paste. This stuff is a goo that makes better contact between the heatsink and processor to transfer heat. You put on a tiny amount and spread it evenly on the processor top in a thin layer with a credit card. Then you place the heatsink onto it. You also might want to hook up the front connectors (USB audio etc) to the motherboard before you put in huge graphics cards that you can't work around. The motherboard manual tells you where to hook up the connectors. Then, assuming you bought an external graphics card put that in (most motherboards now have decent onboard audio and video unless your playing a lot of newer games the onboard video works fine).
I think thats pretty much everything I can think of. Sorry if this was too simplistic and long, but I wasn't sure quite how much you knew already. Feel free to ask any other questions. If you can find a friend that has done this before its always nice to have someone watching you to make sure you don't mess up

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