Good mics are well worth the investment.
+1,000,000
I took the plunge several years ago and bought a Neumann TLM103. Haven't looked back since. It was well worth the $900 I spent on it. (In fact, I've since bought two AKG C1000S pencil condensers for acoustic instrument mic'ing and an AKG C414 for uncolored vocals.)
In my opinion, you need the following for a bare bones project studio:
1. A mixer with the highest signal to noise ratio you can afford
2. A good preamp, preferably tube-based
3. Studio monitors
4. A power conditioner
5. Mic's suited to what you're recording
I prefer Mackie mixers but was told to avoid the CFX models. Get the VLZ models instead because they are much better quality.
For my studio monitors, I own a pair of Yamaha SM-3's. They do the job, but I'd really like to get some quality monitors.
Mixers frequently have preamps built in, but they aren't as good as a standalone unit. These can be used for your bass as well, if you want to go DI. I don't even own a bass amp and yet I've been told I get phenomenal bass tone on my recordings due to my liberal use of this, compression and some EQ done in Cubase.
Power conditioners get rid of the line noise on the electrical signal and keep it at a consistent 120V rating. This has a huge effect on the quality of the recording and is often overlooked.