The first thing to look at is how many instruments you want to record at the same time. That will determine your interface.
The second thing is to figure out how you're going to mix. Do you want to do it on the computer? With your budget that's what I would suggest.
Third, room treatment. You can make a HUGE improvement by doing some reading and building stuff yourself.
Fourth, microphones. Once you've sorted the above out, you'll have a budget left over for microphones.
Once you start specifying what you need from the above, you'll probably start getting some more useful answers
There are 10 types of people...those who understand binary and those who don't
[url=http://homerecording.com/bbs/showpost.php?p=2809743&postcount=1880]My humble home studio![/url]
[post=2568688]My DIY Broadband absorbers thread![/post]
Mbox2, MacMini (Intel), Mackie HR624, Focusrite Liquid Mix, Frontier Design AlphaTrack