This is what I did when I got started in digital recording (been around since the days of 2 inch tape...geesh I'm old)
Computer
Apple Mac Mini (with keyboard and mouse) $650
Shoestring Budget Purchase Plan
Apple has this neat thing called the Gift Card, you can use it almost like a savings account, in that you can keep adding money to the card. If you can drop $50 per week into the card you can pick up your box in a few short short weeks. I got lucky and had quite a chunk of cash from Christmas.
Recording Software
Apple Logic Studio Pro 8 - $400
Logic is awesome, I personally prefer its sound to ProTools. Again you can use the Shoestring Budget Purchase Plan to get the package. This is not some joke application either, it is a real bona fide pro level recording package, used in numerous studios across the US and the world. It is a package that is simple and easy to learn yet powerful enough for any pro out there. Unlike ProTools, there is no extra hardware to purchase (i.e. IO cards, iLoks, etc.) So the $400 price tag, while not cheap, is exactly what you will pay to get rolling.
The great thing about Logic is that you can add software instruments and audio as easy as adding a new track. The software instruments that come with Logic are pretty decent and will at least hold out until you can get sounds that really suit your preference.
Mixer
Alesis MultiMix 8 USB - $127.00
Not a shabby little mixer for under $200, nice and clean, good EQ's and has phantom power built-in so no need to worry about condenser mics.
Monitors
M-Audio AV-40's - $119.00
These monitors are GREAT for the money. I have really come to rely on these little monitors. Yep, there is much pricier units out there but these just sound great and I mix everything from country to hip hop to death metal on happy pills and everything sounds great and I can bring that mix to any environment and it sounds great.
Microphones
2 MXL990/991 Condenser Microphone package ($89-99.00)
1 Shure Beta 91 PZM Condenser - $220.00
Keyboard/Controller
M-Audio Keystation 61es USB MIDI Controller - $129.00
Great little MIDI controller, I have never had an issue with this little unit. The great thing is the USB port on it, I leave it plugged into the Mac Mini all the time and never worry about it.
Cables
All of my mic cables are Monster Cable. I can't recommend 'em enough.
I'll let you in on what I have at home, so at least you can see what a solid small setup looks like, bear in mind though, it's what worked for me and is really simple, flexible and very easy to use, though it may not fit everyone's needs. I have a few more pieces of gear in the studio, but the list above is really the heart of the system.
I was able to purchase everything on a shoestring budget over the course of time and in small doses, which is a benefit when on a small budget. The prices listed above are from Guitar Center's website, your mileage may vary. You really have to get creative about how to go about acquiring gear when on a shoestring budget. The system outlined above was easy for me to get and still live on a horrifically small paycheck and make a $600 a month car payment. Is this system able to handle a whole band in one take? Nope, wasn't designed to, however, if the band wants to do things in overdubs, then this system can handle pretty much anything thrown at it.
I am able to turn out radio ready pro mixes at the drop of a hat. The system gives me enough flexibility that I can do pretty much anything my little heart desires. The software, while easy to use, really is pro level and I have been growing into it and finding new things to do and new ways to get sounds to happen. Yeah, I'd like a few more channels for recording mics and stuff but that will come in time.
Tim's reading list is a really, really good one and I highly recommend going through it.
Hope that helps,
Tripsie