As a musician, you'll understand how the internal mics on a $400 recorder are likely to be afterthoughts in terms of the quality of the gear installed by the manufacturer. Think el cheapo microphones being used to record college classroom recordings of a professors lecture or a journalists interview...but DEF not music fidelity.
So, the recorder should be for recording and, well, a reasonable pair of mics for sound fidelity.
As far as recorders, there have been many worthy suggestions made already in this thread. Personally, I'd stay away from the pocket units simply because, as a traveling band, I'd think the chances are high that it would find its way into someone else's pocket. At $400 or so used, the FR2LE would be perfect...so would the PMD-661.
Since you're just starting, I'd go ahead and make sure to start with a 24-bit recorder. Why not? Prices are nearly the same now as the older 16-bit recorders, although they'd work just fine if you decided on...say...and used PMD-660 which is a FINE recorder too.
For mics, I suggest going onto
www.archive.org and searching for and listening to show samples that use the microphones in your price range to determine those that meet your expectations for sound quality...here are some mics that I know of that fall in the $200 to $400 range for a pair...I think there are LOTS of others that I'm not recalling at the moment.
Audio Technica AT-853 (aka SP-CMC-4)
Octava MC-012
AKG-460 series (non-modded)
AKG-390 series
AKG-c1000
Studio Project C4
Avantone C-1
Church Audio CA-14
Church Audio CA-11
Nakamichi CM-300
I'd also note that most of these mics are currently available used in our yard sale.
I'd HIGHLY recommend buying used because for a $1k budget, you'll significantly increase the quality of your gear that way. This amount is a sort of break point...above $1k you can start to expect better sounding recordings. Below $1k, you have to work a little harder to have sound expectations met...but it's still VERY possible with the gear people are recommending. Point is that $1k goes alot farther buying used that it does buying new.
Hope this helps a bit.