Certainly doable for $700 if you don't need any software. That's where the prebuilt systems will come out ahead. $100 just for XP Home. Bleh. Building your own isn't that hard, but can be frustrating if you haven't done it before. Would definitely recommend reading several websites about putting systems together before trying it.
That eMachines system should be alright, but you'll probably want to add a new video card and maybe more RAM for decent gaming performance. It's a good start towards a nice system, IMHO.
I made a little wishlist at newegg.. Using decent components I'm having a hard time getting it to $700 w/o Windows. I know prices are cheaper at other stores that I would do business with, but it's easy to do this way. I can go cheaper w/ the case and power supply, but both are quality parts that should produce a nice quiet system. It's all stuff that I would actually buy if I were building a complete system for myself. In fact, I just bought the motherboard, video card, processor, and heatsink about 2 weeks ago!
http://secure.newegg.com/NewVersion/Wishlist/WishShareShow.asp?ID=1483219&WishListTitle=plw
Few other decent stores:
www.zipzoomfly.com (I recently bought parts from them to upgrade to an Athlon 64 system..)
www.directron.com (I think they may have some guides on their site someplace)
www.monarchcomputer.com (have decent motherboard / cpu combos at times)
www.mwave.com
Oh, hope you don't need a monitor! FWIW, Best Buy has that eMachines system on sale in a little bundle w/ 15" LCD and printer this week for around $650 after rebates. Lousy printer that you might get $50 for on eBay, and probably $100 - $150 for the LCD.