If you're using a PC then I would thoroughly recommend spending the money to buy a USB external soundcard. I use a Mac so I have an M-Audio Firewire (rather than USB) external soundcard, but if I used a PC I'd buy the M-Audio equivalent for USB. The portability of it is great. If you ever bought a laptop, for example, you could just plug it straight in. Or if you wanted to record at a friend's house, on their PC, you could just take it with you (rather than your lugging your whole PC)

Probably with hindsight I would have invested in a model with more inputs (mine has two) because I occasionally try to record full bands (several different instruments simultaneously) and it would be useful to be able to mic each one up individually, rather than overdubbing or clustering several musicians round a single omni microphone. But for 99% of my recording – which is just myself on vocals and guitar – I get great sound quality results.

Just make sure your sound card has a pre-amp built in. Lots of people slag off M-Audio products, and claim they're unreliable. I've never experienced any problems, and find that their built-in pre-amps are totally hiss-free, completely noiseless.

Especially since I just invested in an AKG C414B XLS microphone. A wondrous thing of joy. But even before then, when I was using an AKG C2000B, I still got results I was happy with. (Hell, I quite like the results I get playing straight into my iBook's crappy built-in mic. Sounds very "vintage 1930s"!)

As far as mics go, I would recommend spending closer to $200 US dollars for a new microphone. As with most things, you're better off 2ndhand of course. I'd look on eBay for any of the following:

Audio Technica AT3035
Audio Technica AT4040
(or any of the Audio Technicas around this price. There's a great little discussion about em here: http://www.sweetwater.com/forum/archive/index.php/t-2532.html )
AKG C3000B
Rode NT1000

As far as software goes, most soundcards come with a CD of software. It'll usually be the most basic, entry-level version of say Cubase or SoundForge, or good old free Audacity. All of which are fine for simple (and indeed often quite complex) recording. But if you want to spend some money, the entry-level Cubase or Logic will do you fine.