What should a DM do when players game the rules?

I enjoy AD&D 3.5 more than any other edition of the game.  One thing I like in 3.5 better than 2.0 or 1.0 is that it is much more difficult for players to subvert the nuances of the rules in order to gain advantages in ways that disrupt game balance.  For example, in 2.0 it is much more likely that players can find ways to combine two spells in ways not imagined and gain a powerful tool to easily defeat most monsters or obstacles.  As a DM, I want to challenge the players, but when the players can just use the same technique to defeat everything, it is less fun for the DM and the players.
In 3.5 it is much more difficult for the players to disrupt the balance, but they can still do some things that are allowed by the rules, but don't make sense in game play.  Here are a few examples:
1) The rules allow players to "hold their action" and go later in the round.  Well, now the players hold their action to see what the other players do, then take their action "just before the monsters go".  I think the rules allow this, but it would never be the way that the character would think.  Would you, in a deadly situation, choose to hold your action until "just before the bad guy shoots you?"
2) Our characters routinely decide when to move and how close to move to a monster based on whether or not the monster has already taken its Attack of Opportunity in that round.  But in a real fight, a person couldn't do that.

Although I don't like it as a DM, I realize that some people care more about "winning" than realism and they believe that anything the rules allow should be used to further their advantage.  I don't play my characters that way, but I am a role-player and want to do the action that the character would do.  So I just allow players to do what they want.  Ultimately, I feel it is just lessening their own enjoyment, which is their own choice.