For when you want to splurge. Some things are truly expensive, such as houses and cars and computers. Then there are things that are relatively expensive, such as a $4 coffee or a $115 dollar parking ticket. Then there are little luxury items that seem expensive, but, since they are not regular purchases and will last for years, we think are relatively cheap.
Good towels and sheets fall into this category. You use them every single day, you appreciate how nice they feel against your skin, and they only cost tens of dollars more than midpriced brands. It's a no-brainer. Cut down on the lattes and really enjoy waking up and going to bed in your own home.
Second up: Milagro towels ($37) made out of long-staple Egyptian cotton that is so soft and absorbent you will smile (and your guests will be jealous). They come in 13 colors (this one via NYTimes). 
I am a linen and towel junkie and would buy Matouk or other super-high-end brands if I could afford them.
Instead, I go to Century 21 and buy the very best I can find. Now that 600 tc items are available, I've been happier.
I'd like to learn to sew in order to make duvet covers and shams from fabrics I like.
For nice/high end linens and towels at a discount, definitely check out TJ Maxx, Homegoods, etc. It takes patience but these things do show up from time to time.
Also ebay. I know there are a lot of fakes on ebay, but a lot of discounters/outlet shoppers also sell high-end linens there.
Me, I'm all about the Getting The Good Stuff Cheap.
HeLLO! These towels are on sale RIGHT NOW at Horchow.com
After some research I discovered the "Milagro" towels are called "the Marcus collection" at Horchow. When you get them the label says "made by Matouk for Neiman Marcus." The towels are now $24.99 until July 24th, and you can get them monogrammed for free.
Nell, you are AWESOME! Thanks for taking the time to post that info, I greatly appreciate it!!
Horchow is once again offering their "Marcus" collection towels on sale until 3/2006. They are wonderful and you can get free monogramming if you wish on them.