I evangelize MCE to pretty much anyone who will listen. Once they're sold on the concept most ask how much it costs, I tell them that the cost of an entry level system is pretty minimal $300-$500 but the sky is the limit depending on what you want to put in it. Here's my system and the reasoning behind it. In most cases the link goes to the manufacture's page, but in some cases (OEM or I couldn't find it on their site) I link to where you can buy it.
Case: Ahanix D4 Media Center Enclosure ($220) - The case comes with a 350 watt PSU, but I didn't use it in my MCE; Ebay it to make some money back. The case is the most important thing to get right when building any PC. It is the part I hold on to the longest, a good case can last through many upgrades; the config below is the 3rd HTPC to sit in it. For a long time I tried to go budget when selecting a case, and always regretted it. Get the best case you can afford, getting cut up when you're messing around in the case really sucks. Unless you really need to get a micro case go for a full ATX. Motherboard selection is very limited in the micro-ATX format and you can always put a micro board in a full size case if you find one that suites your needs. This is a great case, when I bought it there wasn't much selection in this form factor, now the landscape is very different with some really nice cases from Silverstone and other vendors. One negative for this case is this case is cooling, stock it has two 60mm fans in the back and no mount in the front. I added a 60mm-80mm adapter to one of the mounts in the back and it cools OK, an additional fan in the front would be better.
PSU: SILVERSTONE Strider SST-ST40F ($70) - Like the case a good PSU will last through several PC upgrade cycles. In a HTPC noise level is more important than raw power. I opted for a 400 watt, which will provide ample power for several hard drives, a single video card, and a fast CPU. Get one with PFC, your components will thank you.
Motherboard: GIGABYTE GA-M59SLI-S5 ($164)
GIGABYTE GA-M57SLI-S4 ($120) MSI K9N Platinum ($100) - When building a new PC, I usually choose the motherboard first. It forms the foundation of the PC, selecting a good board will save you time and money in the long run. I stay away from budget and overclocking boards; stability is a must in a HTPC. When I built my current PC, the selection of Core 2 Duo boards was terrible so AM2 might not be the best price/feature/performance selection right now, but it was then. Things I look for are gigabit ethernet, firewire, digital audio outs on the board (not through a riser card), and lots of slots, both PCI and PCI-E. This board is passively cooled, so make sure you have a good case fan(s) in the back. This board has two big advantages over the boards I had before. The first, and most important, is that it does Dolby Digital Live encoding; a feature that made me hang onto my Nforce 2 based board far past it's prime. And the second is that it uses a heat pipe to connect to a heat sink right under the exhaust fans in my case, which has made a huge difference in the system temp.
CPU: AMD X2 4200+ (65 Watt) AM2 ($169) - Get two cores, video conversion is multi-threaded; scanning for commercials on one core, recording, playback, etc on the other; you won't regret it. Intel and AMD both have excellent choices across the budget spectrum. The AM2 chips are cool, fast, and available in low power models. Ultimately, make the chip choice based on the motherboard you select, but it's hard to go wrong with any modern (i.e. don't get a P4) dual core cpu. If you don't need to go over the 4200, get the 65 Watt model, it's just as fast but much cooler; remember that heat is your enemy as heat equals noise.
HSF (Heatsink and Fan): Retail HSF ($0) - I wish it was quieter, but it's not loud enough for me to do anything about it.
Videocard: Gigabyte GV-NX73T256P-RH ($90) - I use the Nvidia PureVideo MPEG decoder, which tends to favor Nvidia's GPU's from a performance perspective; also the picture quality is better with Nvidia's GPU's and the selection tends to be better. There are valid reasons for selecting an ATI board, and like the CPU it's hard to go wrong with either. If you aren't going to be doing serious gaming you don't need a high end board. I'll probably get flamed for saying this, but anything faster than a 7600 class board is overkill in a HTPC. Get a card with 256MB of fast RAM, the bandwidth between RAM and GPU is the most important thing for studderless HD playback. Also, spending less on a card today, makes it easier to get the next generation tomorrow; with product cycles around 6 months spending too much on a video card is a waste. I prefer to get a high-end budget card (7300GT) to a low-end midrange card (vanilla 7600); the GPU's often have the same feature set for video playback (the difference is in pipelines which only helps gaming performance) and the RAM is faster in the GT type cards. The budget cards usually run cooler, so you'll have more options when it comes to cooling the card (I like the passive cards).
RAM: OCZ OCZ2G8002GK 2GB ($210) - Get a lot of fast RAM. In most applications RAM is more important than CPU. But RAM is easy to upgrade, and with the way the price fluctuates timing is everything, so sometimes it better to get what you need now and upgrade to what you want later. The price here is $40 more than I paid when I built my box a few months ago.
Hard Drive: Seagate Barracuda 7200.10 ST3320620AS ($90) - There's little to no difference in speed between SATA 150 and SATA 300 drives, but some SATA 300 drives have NCQ which does make a difference in multi-user environments. Even the simplest systems can benefit from the feature, and at $90 a drive you can get a couple and have more space than most will know what to do with.
Optical Drive: LG GSA-H22N ($30) - Someone may have a legitimate reason to spend more on a DVD drive, but IMO as long as it burns and reads DVDs, cheaper is better. This drive is quiet and fast, hard to go wrong with that in a HTPC.
Network Card: Integrated Gigabit ethernet.
TV Tuner: Hauppauge WinTV-PVR-150MCE ($65) - I've had, and have other MCE tuner cards, but this one is the best.
Remote: Logitech Harmony 680 ($85) - Completely optional, but makes the experience so much nicer. The activity based control brings the SAF way up. Before I had this remote, I had a more traditional universal remote and navigating the inputs on the receiver and TV was a pain for everyone but me.
IR Receiver: Microsoft MCE 2005 Remote ($40) - Not much to say, you have to have it.
Keyboard/Mouse: Gyration RF Keyboard and Mouse ($85) - A true anywhere in the room keyboard and mouse solution. The keyboard is small, so it fits nicely away when I don't want to see it. The mouse takes some getting used to for in the air use, but it is intuitive and really works.