Hi Bob-
Well....you've opened up a can of worms. But, the good news is that no matter where you start, the change that goes on in this art never stops! So, in essence, it doesn't really matter where you start. The good news is that you can absolutely make good recordings with Sonar 8.3. In some ways, I preferred it to X1. There are some cool features in X1 and probably X2, but not having them won't keep you from making quality recordings.
I think the key to this artform is picking what it is that you want to achieve each year. The reason I say this is that as your gear and setup get better over time, your skills using the stuff does to. But it works a lot like a scaffold. The left can only go up so far before the right needs to catch up. So, try to pick what you want to achieve.
For example, if thick and juicy guitar tones is what you're all about, then there are ways to get them. Your DAW won't be the limiting factor at all. Adding soft synths for drum and key tracks worked fine in 8.3, and they should work fine on your platform.
Bringing up analog mixers is sure to start a debate. I use one, but many folks on this forum do not. I prefer mixing out of the box, but if you are going to primarily use effects, etc. in the box, then a mixer is not really necessary, and it won't buy you better results right away. When you need flexibility with routing signals between different hardware is when a mixer becomes hugely useful.
So, the core of your home studio really will be built around your interface and converters. Most of the time, they are built into the same unit. Although, if you feel like spending >$3K, you can separate all of it into dedicated hardware.
Being that you are currently running XP, look for a product that is compatibel with at least XP and Win 7. There are many, so it shouldn't be a problem to find one. You are inevitably going to replace your DAW at some point, thus you want to invest in an interface that will move forward with you. I have been really pleased with RME's products, and I know that others on the forum have been happy as well. I've also heard good things about the MOTU products as well.
After the interface, you'll eventually start looking into other gear too. There is absolutely one rule that adheres to all home studios: bad in = bad out!!! I can't emphasize this point enough. Many reputable folks on this forum and on other forums keep advising people of this fact, but unfortunately it's not sexy enough for most. What this means is......buy some sort of room treatment. It will make a huge difference.
Afterwards, good guitar tones come from good sources, etc. You get the point I'm sure.
So, in sum, the point is plan a path that will allow you to work your way up. This art is totally addicting!! But, it's also totally worth it! Your current platform should work to get you going. If you can create a dedicated DAW, you won't be disappointed. But if you can't, you can do well with what you've got. If you have the opportunity to wipe your system and start from scratch, you'll be able to get your different devices to work together. It takes a little time, but remember, these are just machines.
Good luck, and keep asking questions.