Windows XP is the best choice for low-cost and simple HTPC. I spent a lot of time trying to breathe life into various flavors of Linux, but Linux wants people to commit a lot of time in order to iron out all the hardware and software problems that arise with Linux. These problems are not fun and not interesting, and I don't have that much time to burn, so Windows XP is the only viable choice for me.
Windows 7 is nicer, but completely unnecessary except for hardcore gamers. Windows XP works just fine for those on a budget. I like games produced between 2001 and 2005, so I may never need to upgrade to Windows 7.
I found a great web site the other day for optimizing Win XP for HTPC.
By using many of that gentleman's recommendations for disabling unnecessary Windows services and by making educated deductions based upon his excellent information, I was able to cut the boot time of my HTPC from 3 minutes to 30 seconds.
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