I was looking at the Atom powered HTPC deal here (http://www.ozbargain.com.au/node/56030#comment-647050), but I if you're after something even cheaper, here's a setup worth thinking about that's much cheaper…
I recently bought the Lenovo M55p with Windows XP Pro for $139 delivered from a deal on here (http://www.ozbargain.com.au/node/54196 - very similar deals are available on Ebay or http://graysonline.com.au) and added a graphics card for $75 delivered, making a good little HTPC for a total of $215. It beats this by coming with a complete OS, hard drive, DVD burner, mouse, keyboard and memory, all of which seem to be still required with this system (costing more than a hundred dollars extra!).
It's not quite as small as this deal, but not heaps bigger. Not as wide as my Blu-Ray player, but deeper and a little higher. It's a small form PC and is dead quiet and runs cool, with a Core2Duo E6300 processor that is quite capable.
It was working fine without the extra video card, as someone else attests on the previous link, but was only VGA out. The VGA was surprisingly clear on my 54" plasma, but I wanted HDMI to have the sound integrated with the video signal, as my TV wouldn't allow VGA & analogue sound input to be merged.
To do HDMI, you need to source either a PCIEx1 or PCI video card with HDMI out and then you're in business. Unfortunately this system doesn't do PCIEx4 or x8 or x16, though some very similar ThinkCentre systems on Ebay do. Whether you use a PCIEx1 or PCI card, they need to be low power as it's only a 225W PSU. I recommend the HIS ATI 5450 PCI that you can get from several places in Australia - works really well - several people on the net complain that this card doesn't work in PCIEx1 format in this computer, but it works well in the PCI version. Some of the Nvidia Ion cards are available in PCIEx1 format (like the 210), but they're hard to find in Australia. For the ATI card I got see http://www.shopbot.com.au/m/?m=HIS+ATI+HD+5450+SILENCE+PCI+2…
Whether you use a PCIEx1 or PCI card, you will be able to fit in a TV tuner card later on, as you will have either a PCI or PCIEx1 free. TV Tuner cards are fairly common in PCIEx1 format.
I am using XBMC (http://xbmc.org) on top of Windows XP very happily with this configuration, allowing file sharing, web browsing and gaming on my TV, or if you're worried Windows XP will overload it you can always use the XBMC live version built on top of a cut down Ubuntu, or the new OpenElec fork that is an incredibly minimal Linux which is never seen and boots straight into XBMC - http://www.openelec.tv/ - this is referred to on the XBMC blog atm.
I also got a Riitek Rii Mini i6 remote keyboard & trackpad & learning remote that I am relatively happy with for under $50 from Ebay. It has a minor problem at present with keys repeating because they're sticking, but it seems to be improving as the keys are used over only a few days. I am also using a wireless mouse, but XBMC will work with an MCE remote no problems.
Teh sticking keys issue with the Riteck Mini i6 was actually more related to a dodgy Asus mini bluetooth dongle. Much better to get a bigger cheaper one and add a 3cm antenna to it. Look on instructibles.com