marsy:
Also, I am pretty new to electronics, this is going to be my first project, so I don't know what you mean by make sure I have a common ground? The host device supplies a ground pin, do you mean I should plug that in next to the Vin pin and plug the ps2 controller ground into the GND near the 5V pin?
Yes. All the GND nets should be connected at some point.
You should be fine with the 12V supply, since the NCP1117 can accept up to 20V input. It is wise, however, to allow for proper ventilation of the regulator. The more current it has to supply, the more cooling it needs.