As far gear is concerned, you basically have three options:
1. Let them choose all of their gear. This will produce more powerful PCs than average for their level, because they don't have to deal with the vagaries of actually campaigning to get custom gear.
2. Choose all of their gear for them. Unless you're also creating pregenerated characters for the group, this is a bad idea, and isn't much fun for anyone concerned.
3. Let them choose a certain amount of their gear, and assign the rest. This can work fairly well, but it's also pretty easy to screw it up.
Personally, I'd go with option 1. The players will have a blast (if they're anything like me or my group, they'll spend hours and hours picking just the right items), and I don't find that level of customization to be terribly unbalancing. Particularly if you don't fudge die rolls during combat, having a little extra padding between the party and random deaths is a good thing, IMO.
Edit: of course, you still retain veto power over problematic items and combinations of items. If you do go with option 1 and you want to avoid uber-focused specialized characters, make it clear from the outset what your general restrictions are on item choices. Some PrCs and character concepts can become truly gross in their area of expertise with the right combination of items (generally, a combination that wouldn't be acheived in actual play). Avoid this, and you should be golden -- and depending on your players, you may not need to do anything to avoid this (if they're not approaching things from a powergaming perspective, etc.)
