First you need a good set of mics (most important). Marshall Electronics has a good set of condenser mics (vocal and insrumental) for $99 - Marshall Electronics MXL Anniversary Microphone Pack (a very good buy). With these mics you will need a preamp and 48 volt phantom power.
A small mixer board such as Behringer UB802 (about $40) has phantom power and preamps for two mics. Then you will need some cables and mic stands.
So alltogether for under $200 you should be able to make some very high quality recordings. I use a similar setup, but with separate higher quality preamps and a mp3 recorder (20 GB) to store wave files which I later upload to my computer.

Cheers, S. in Seattle