Some sound cards are not set up to allow record while monitoring. Check your docs on the computer to make sure the sound card is "full duplex" - some of the cheesier soundblasters used to be full duplex ONLY at reduced sample rates.
Volume controls when recording are usually on a separate tab on the volume control icon. Double click the speaker icon to bring up volume controls, click on properties, select recording, and you should have some control over record levels.
You didn't specifically mention WHICH software you have - this type of omission is common with new posters, and makes it hard to answer without multiple posts back and forth.
If it really is your software that's the limitation, you might try N-tracks - I've not used it, but several people here have, and like it (partly because it's cheap, mostly because it's a good deal) - here's a link, you can get as shareware for about $50 if I remember correctly.
http://www.fasoft.com
If your computer has a USB port, another option that would cover everything but a mic, is the Aardvark DirectMix USB3 - it contains external preamp AND D/A converters, so that you're not trying to put a low level mic signal into the electrically noisy environment of a computer - instead, you amplify and convert to digital BEFORE it gets into the computer - much cleaner sound. If you don't want the unit after you're done with the project, you can always sell it after. Note that this unit is bundled with Cakewalk Guitar tracks software - that would cover the software needs.
http://www.audiomidi.com/common/cfm/product.cfm?Product_ID=995
This unit is available for $229 mail order, and with a Shure 57 mic you would be set for decent recording. The Shure 57 is a mic even pro's use (I have 5-6 of them, among others) and will do a good job on nearly anything. They usually sell for about $80-90 mail order, and when you're done you could sell it locally for at least $50 (if you don't use it to pound nails with first)
Here's a link to buy the mic -
http://www.americanmusical.com/item.asp?UID=2002122312550731&menu=&keyword=&item=SHU+SM57LC
Those two purchases would (barely) be within your budget, both are resellable for a fair portion of their original purchase price, and would get you decent results if used in a decent environment with proper techniques.
The environment and technique part you can learn more about as you go, by posting your questions here... Steve
