Some additional notes -
Disclaimer: I haven't done a MAME Arcade machine myself, but I have looked into building one. So, all my advice comes from research, and not practice.
For the cabinet, you can build your own out of plywood. It isn't as "authentic", but it may be cheaper, and you can mimic classic, valuable games without destroying originals. Also, there is more then just the typical upright cabinets, there are the "cocktail" cabinets, with the screen facing up and the controls often on both sides. These cabinets usually have a smaller display in them, thus allowing a smaller (and cheaper) computer monitor to be used in them. I've heard of 15" monitors being used. With each player having their own side of the machine for their controls, there is more room.
I know it was stated before, but BE CAREFUL REMOVING THE ARCADE MONITOR! Arcade monitors, like computer monitors, and televisions, have capacitors that store thousands of volts even when the machine is turned off. There is a device that can be used to discharge monitors safely, it looks like a soldering iron with a wire ending in an aligator clip instead of a power cord, and it has a voltage gauge built into it. To use, you attach the aligator clip to a good ground and poke with the other end under the rubber ring on the top side of the picture tube until you see the voltage gauge register a discharge.
You don't need to decide between an 8 way and a 4 way joystick. Happ controls (website given later) has joysticks that can be set for 4 way and 8 way control.
A touchpad can be useful if the supporting OS traditionally uses a mouse for navigation.
A trackball can be built by gutting a mouse and using its internals (obviously an optical mouse isn't the type of mouse that's useful for this). Try using an old serial mouse because they are less valuable, and they allow you to still the ps2 mouseport on the computer for an unmodified mouse.
A keyboard hack isn't a bad way to go, if you do it right. A keyboard hack doesn't allow analog controls, and you need to build a keyboard circuit splitter if you want to use a normal keyboard as well, fortunately, both tasks only involve basic electronics. I would recommend using the gameport for analog controls, one gameport can support two analog joysticks. There is also tearing apart cheap USB gamepads and using them, but most people don't need to use the gameports for anything else, or else can wire up the gameports to switch from one set of joysticks to another (try a break-before-make switch).
Unless you are using a spare machine for parts, try buying a Duron 850mhz+ or an Athlon 1000mhz+, with 128 or 256 megs of memory. The prices aren't that different from a used K6-2/3 or Pentium II, and some games, such as the MK series, really like the power of the faster processors. A cheap 200W powersupply works fine, since there are no CD drives or floppies. I would recommend taking a cheap desktop case, stripping out all electronics, and fastening it securely to the cabinet. Attach a surge protector strip inside of the cabinet and plug all electronics into it. Then wire that to an external switch and plug.
For video card, I must disagree with the author. 8 meg AGP cards are cheap, and easier to find. Also considering getting a card with composite out, if you want to hook it up to TV. For the sound, I would recommend a cheap 2 or 4 channel sound card and wiring some external hookups on the back of the cabinet, that way, in addition to using the cabinet speakers, you have the ability to hook it up to an external stereo system.
For a hard drive, its going to be hard to find anything under a 20 gig new. Don't worry about buying a 20 gig, the price is simular to an 8 gig, and you can fill the rest of the drive with mp3s (see, weren't the external sound outputs a good idea now?) Also, there are versions of mame that allow multiplaying over the internet, maybe you want to add a network card. ;)
In addition to MAME, try NeoRageX, Nesticle, zSNES, Genecyst, NO$GMB (might be harder to find that), and Massage. NeoRageX is faster then MAME on older hardware, and the rest are console games that are still fun to play on an arcade machine. All emulators listed are DOS, and will work under windows, there are probably linux alternatives I am unfamiliar with.
For the OS, if you don't want to do networking, and you have no USB devices, DOS is probably the best OS. Easy on/easy off. Otherwise, try Win98. Think about hiding a joystick and two usb ports somewhere on the machine, so you can plug in gamepads for the games which have incompatble button layouts. (Axispad is a $20 Target special that has dual analog sticks, one digital direction pad, and 10 buttons, including 4 shoulder buttons. USB & Gameport connections are provided.)
Finally, I would add these links
www.happcontrols.com (arcade supplies)
www.mouser.com (electronic supplies)