I would get the Digital Rebel XT, tripod,macro lens, telephoto lens, protection filters, camera bag, and a light tent if you're going to shoot isolated objects. I tried just using a Sigma macro telephoto lens in the beginning for my close up shots, but it just didn't get close enough. So if you're planning on doing lots of macro shots, I would buy a macro lens.

Olympus E-510 two-lens kit (14-42 plus 40-150) and the 35mm macro is within your budget. The Olympus kit-lenses are extremely sharp, corner to corner, as is obviously the macro,  and the camera has built-in IS as well as live-view. A very nice kit. Be aware that the Olympus has a crop-factor of 2.0x (Nikon is 1.5x and Canon 1.6x)

Another alternative is the Nikon D40X two-lens kit (18-55 plus 50-200 VR). There should still be enough money for a good macro-lens. Be aware though, that the only macro-lens that will autofocus with the D40X, is the Sigma 150mm f/2.8. It's an incredible lens, and works fine with a TC as well, but it brings you slightly over budget. In my view, AF isn't important with a macro, since critical focus is better obtained manually anyway. The 50-200 VR has also gotten rave reviews.

A third alternative is the Nikon D80 with the 18-55mm, but to stay within budget, you would have to choose between a tele-zoom (the 50-200 VR) or a macro. The nice thing about the D80, is that it has a better viewfinder than the above (and better than the Canons), and better manual control than the D40X.

XTI + Tamron 28-75/2.8 (decent close focus)

Here is my suggestion:
Canon XTi Body kit (with 18-55): $680
http://cameras.pricegrabber.com/digital/canon/m/24712314/search=xti

Canon 50mm f/1.8 II : $80
http://cameras.pricegrabber.com/slr-lenses/m/587416/search=canon+50mm+f+1.8

Close up lens +4 (52mm filter diameter) for the canon 50mm: $25

Canon speedlite 430Ex: $250
http://cameras.pricegrabber.com/dedicated-flashes/canon/m/11456350/search=speedlite

Some OK tripod: $100

Flash cards and other stuff: $50

TOTAL COST: $1185

This setup will let you shoot pics for microstock in high quality especially if you shoot majority of the pics with the 50mm lens. The kit will also give  you decent results if you stop down to f/8.

Anyway, your preferences might vary but this is what I will do.

If this helps you: I love my Canon XTi. Have the Kit lens and a decent Tamron 55-200, but I also love love love my Tamron 28-75/2.8

BUT, I think if you know what you are doing and are very careful you can get great shots from a $20 tripod.

That depends entirely on outside circumstances that you can't always control. If it's windy, it's a problem, if the shutter speed is around one second, it's a problem (very long shutter speeds in calm conditions are not that much of a problem, since the camera/tripod will have time to "settle down" after vibrations caused by mirror, shutter and possibly shutter release), and the list goes on.

In addition, a cheap, mostly light tripod will be very top-heavy when the camera is fitted on top. That means that it will tip over for nothing, possible causing the whole $1,200 investment to go down the drain, except the cheap tripod, which will usually survive   

BUT, I think if you know what you are doing and are very careful you can get great shots from a $20 tripod.

Don't even entertain a cheap tripod.  Go without.  You are better off having the camera around your neck than sitting on an unstable tripod.  Save for something heavy and rugged that will outlive the next 10 bodies you purchase, and support the heavy beastly lenses you will add to your kit. 

Take it from me... a wind gust knocked over my old tripod last fall and the impact broke my Nikon in half.  It's horrifying, imagine witnessing your spouse being hit by a car and seeing their wires and chips dangling from their torso. 

Purchase/make a couple beanbags and use those to stabilize your camera on a table top or a car hood and save for the best tripod you can get.  Beanbags work surprizingly well.   If you can't find one simply sew (or beg someone to sew) together a square and fillit with a bag of lentils, barley etc. from the grocery store.

Alright well I just placed the order. 

Canon 400D with 17-85mm lens $1099

Polarizer $29.90

2GB Flash Memory $44.90

Going to just pick up a tripod from BestBuy.
After talking with a good friend, I decided against buying any sort of lighting equipment to start with. I don't really fancy messing with all that to start with. That might come down the road after a few more payouts. 

Watch the ads you might be able to get a mem card even cheaper. I bought the SunPak Platinum Plus 7500 Pro from Best Buy. It is very sturdy. But very heavy also. It works great indoors and out. It's heavy to carry around though. I think it was about 100 bucks but I got it cheap because my son was working there at the time. If you know someone that works there they have good emplyee discounts. Not much on the cameras but other items have good ones. Lenses are over priced at Best Buy. Cameras seem to be competively priced. I would also invest in some kind of shutter release. They are worth the money. Have fun with the new camera.