I'd suggest staying away from messing with the 120VAC directly if you've not had some basic electrical (not electronic) training. If you make a mistake with the Arduino, you fry a $4 ATmega or a $34 board. Make a mistake with 120/240, you can kill someone, burn your house down, etc.
Not sure where you're getting your power supplies (for $20 each I'm guessing Radio Shack), but in about a minute I found several different 5V regulated wall warts for less than $6 at my favorite surplus places, All Electronics and BG Micro. For less than $2, you can get an unregulated supply that, combined with a regulator or maybe just a diode, would do the trick.
You do have a junk box, right? The box/drawer/closet/spare bedroom where you stash all the electronics that don't quite work, but you're not ready to throw out? Look at the power supplies there. An oddball 4.3V cell phone charger will be enough to trigger the 5VTTL input on the Arduino.
Go to your favorite discount store, look at off-brand cell phone/iPod chargers. If it's got a USB jack type connector, that's regulated 5V ready to go.
If I were going to try and do this with 120VAC directly, I'd look at using direct rectification of the AC, add a capacitor to filter it a bit, and interface that with an appropriate optoisolator. And fuses. And insulation. And testing. Lots of testing.
-j