Well, as their using it for office work, it doesn't need a work horse GPU, or CPU for that matter. What I'd really recomend though is, although you have an "old 17"" TFT monitor, I'd replace it with a new, higher spec one i fthey'll give you the extra dosh.
CPU wise, A Dual Core AMD 64 will be powerful enough, with enough omph! to run any current programs.
So I'd Agree on the cheapest dual core AMD 64 X2 Retail @ $67
Harddrive, I'd go with this one at 250GB for $49, not bad and it's SATAII. Yes your folks are gonna want storage space, but even with hi res 2MB Picture files, that's 125,000 pictures. Don't think they'll ever realistically fill a tenth of that in pictures.
As for optical drive, DVD-RW's have got to the point CDRW's were 5 years ago, they're all the same on paper, and more or less in operation. LG's however have always been the best in group tests for media compatibility.
I'd get a new case, It'd be nice to show case a new System. It's small with being a Micro ATX, but as it's a build specifically for non-system intensive tasks, it's unlikely to be fiddled and modded regularly. Plus you get a decent 300Watt Antec PSU and tri-speed exhast 12CM case fan included and installed. (Those are solidly built btw. I use its big brother, the Solo case. Very good build quality)
For the Motherboard, the cheapest, fully integrated, nVidia chipset ASUS model for the Micro form factor for your case. Asus are a superb MoBo brand, and are definately one of the best brands, if not thee best. Onboard graphics is decent enough for day to day tasks, and the occasional "old" game. nVidia 6100 onboard Graphics, although not a benchmark breaker by any means, will be far more powerful than any other onboard graphics, especially in this price range. Support for a decent amount of RAM and PCI 16x for future graphics upgrades, should the role of the PC change. Also SATAII to drive that WD Hard Drive. With it being a nVidia chipset, you're getting decent ammount of additional features integrated with the chipse, and easy to install and update all in one drivers. Stay away from VIA chipsets if you plan on upgrading from onboard graphics to the PCI16x in the future or want a headache with stabilty and drivers. ATI are still a league beind nVidia in this area and sis dont quite cut the mustard compared to nVidia either.
Memory, 2GB's for future proofing, and in two sticks for dual channel memory.
This stuff is 800MHz effective, and although a cas latency of 5, in real life, this matters not. Also, the 800MHz with CAS5 will outperform any 667MHz less with a CAS of 4 3 or 2.
So far, a grand total of $351.
You'll get enough cables with the Mobo and Case, so I wouldn't worry about those. 2 things I would invest in though are -
A muti-card reader. Very handy for all those Picts and family digital camera memory cards you might in the future need to look at. far simpler than pulling out USB cables for every digital device with memory card slots you have. inc Phone etc etc.
And I'd get an internal WiFi adapter, you never know what home network router, or if the PC will move elsewhere in the future. Although this one is more expensive than what else is out there, you should note that the stability, range, quality of signal and compatibilities vary widely between WiFi card to WiFi card, and you almost always get what you pay for. I recomend this one, at $50
Bringing the grand total to just about $413, just a tad over budget.
Although a few of the things my list may sound somewhat unreasonable, when you think what the machine will be used for, and for how long (potentially 9 years if as long as the last machine your folks had) I think this is a sound and pretty rounded build for the budget you've been giving. Perhaps the only difference people might want is a full ATX mobo and Case. I'd agree depending on if the machine is going to be overhauled every few years or so, but this'll mean the additional cost for a half decent PSU and one that'll be able to handle your future requirements if you will be overhauling it regularly.
Just what the Doc ordered though. There's my 2P. Or 2 Cent in this case. Hope it helps.