$500 including a monitor and OS is pretty tight but the machine below is pretty good:
1) CPU - I'm picking an AMD Llano processor because they have a really good onboard graphics processor which means we won't have to buy a graphics card. Now in my opinion there are two choices depending on what else you're going to do with the computer. If you want to do some light gaming (I stress *light*) then you want higher clock speeds but if you're a big multi-tasker (if you want to do large data transfers and watch video and surf the web all at the same time) then clock speeds aren't as important as multiple cores.
*($70) AMD A4-3400 Llano 2.7GHz Socket FM1 65W Dual-Core:
http://www.newegg.com/Product/Product.aspx?Item=N82E16819103955
*($90) AMD A6-3500 Llano 2.1GHz Socket FM1 65W Triple-Core:
http://www.newegg.com/Product/Product.aspx?Item=N82E16819103951
(2) Motherboard - I went with a budget socket FM1 micro ATX motherboard. Low price tag, small form factor, and no special features.
*($65) GIGABYTE GA-A55M-S2V FM1:
http://www.newegg.com/Product/Product.aspx?Item=N82E16813128528
(3) RAM - 2x4GB, 1600mhz, CL9, 1.5V.
*($29) CORSAIR Vengeance 4GB (2 x 2GB):
http://www.newegg.com/Product/Product.aspx?Item=N82E16820233187
(4) Hard Drive - If you need a hard drive large enough to save a whole lot of media then you're going to bust your budget. I recommend getting whatever 7200RPM drive you can find around 500GB from Western Digital, Seagate, Samsung, or Hitachi.
*($80) Hitachi 7200RPM 500GB:
http://www.newegg.com/Product/Product.aspx?Item=N82E16822145299
(5) Optical - It might be tempting to splurge on a Blu Ray drive for an HTPC but Blu Ray playback is pretty infuriating at this point. Go with whatever $20 DVD burner makes you happy.
*($20) ASUS 24x DVD Burner:
http://www.newegg.com/Product/Product.aspx?Item=N82E16827135204
(6) Case - There are a lot of cases in the world and it's all about personal preference in a build like this. If you tell us what you want from your case then we can help you pick one. You shouldn't have to spend over $50 on one.
(7) OS
*($100) Windows 7 Home Premium 64-bit OEM:
http://www.newegg.com/Product/Product.aspx?Item=N82E16832116986
Assuming you get a $50 case and the $70 processor then so far it comes to $414 before rebates and shipping (and I didn't shop around for the lowest prices). That should leave you room to add a budget monitor around 18"-20".
Here are some add-ons that are nice in an htpc:
(8) Video Card - You don't need a video card with the Llano processor but it would give you slightly better playback at higher qualities.
*($65) EVGA GeForce GT 430:
http://www.newegg.com/Product/Product.aspx?Item=N82E16814130579
(9) Wireless Adapter - You should really use a wired connection, but if that's not an option you'll need a wireless card.
*($20) Rosewill Wireless N Adapter 802.11b/g/n:
http://www.newegg.com/Product/Product.aspx?Item=N82E16833166038
(10) TV Card - If you use cable (not satellite) without a set-top box then a $60 tv tuner can turn your media center into a DVR. This works great with Windows Media Center.
*($60) Hauppauge WinTV HVR-1250:
http://www.newegg.com/Product/Product.aspx?Item=N82E16815116028