Basic Equipment

MIDI Controller ( external hardware with USB connection)
Microphones (minimum of 1) and stand(s)
Cables to connect the microphone(s) to the MIDI controller
Computer
Multi-track Mixing Software
Other Software

MIDI or DAW (Digital Audio Workstation):
I used a Steinberg CI1.  For the "One Man Band"  rarely would one need more than 2 inputs.  The CI1 has 2 mic/line inputs which will accept phono or XLR jacks.  It also has +48V phantom power (for standard condensor mics) and a Hi-Z button for line 1 so that you can plug your guitar directly into the MIDI.  Each input channel has a gain knob.  It is not meant to be a scaled down version of a mixing board.  For about $100 CDN, this is a simple yet quality piece of equipment.  It's purpose is accept analog sound and convert it to digital and pass it on the the computer for storage and future manipulation.

MICROPHONE (cables and stands):
The sky is truly the limit.  Without a doubt condensor microphones are far superior to dynamic mics.  My first recording used the dynamic mic from a Microsoft web cam!!  It will work but when money comes available shell out for a decent condensor mic (or two).  I found a pair of Apex 185 (matched) pencil microphones.  These came in a foam filled carrying case, shock mounts to fit standard mic stands and Interchangeable omni directional capsules and cardioid capsules.  These are traditional microphones with XLR sockets.  I could spend more time talking about some of the other features of these microphones.  For my "one man band" (portable) studio, these smaller condensor mics have proven their value.  I picked these up on Kijiji (including 2 x 25 ft XLR cables) and a microphone stand for $100.

HEADPHONES and/or SPEAKERS
I purchased Sony MDR-XD200 stereo headphones, mostly because they came with both 1/4" and 1/8" phono jacks (the larger jack fits over the smaller jack).  I can plug them into my guitar amp or directly into the back of the MIDI.  Pull off the 1/4" phono jack and they will still plug into the Logitech speakers connected to my computer.  As for speakers, I bought Logitech Z623's with THX.  I may not have the most discerning ears on the planet but I can clearly pick out subtle filter changes made in the mixing software when replayed through THX certified speakers.

COMPUTER:
I use PC's.  I have both a laptop (running Windows 7) and a desktop (running Vista).  Both have USB 2 ports.  Although newer systems have faster USB 3 ports, I have yet to find a reasonbly priced MIDI device capable of USB 3.  That will change.  I don't think that there are any special system requirements.  I've never had a system resource problem and I've recorded up to 11 tracks for a single song and I still ran several applications in the background.  All you need is a free USB port, preferably USB 2 or better.

MULTI-TRACK MIXING SOFTWARE
Most MIDI devices come with mixing/editing software.  The Steinbert CI1 does but I don't use any of it.  I started using Kristal which is freeware.  It is a great place to start especially if you've never worked with audo editing software.  I've pulled Sony ACID Music Studio from a sale bin at Staples.  I have also worked with the demo version of Reaper.  I know a lot of musicians that use Avid Pro Tools.  If you want to collaborate with other musicians then Pro Tools may be the way to go although the price tag will be $700.  I picked up Sony Music Studio for $30, Reaper is only $70 and has a lot of features.
There needs to be an entire discussion on VST's and VSTi plugins.  These come in the form of sound effects as well as instruments (such as drum machines).  Not all plugins play well with all software especially the free plugins.
To start with it can be a challenge just to add a track and figure out how to connect that track to the correct input on the DAW, or MIDI. Once a riff can be saved, having the ability to edit and loop that block of sound becomes the next challenge.  Instead of musical notes on a page, you look at a two dimensional tape representing the sound wave.  I have yet to find a piece of mixing software which did not provide basic time signature, beats per minute.  Again, instead of sheet music lines and bars, you look at wavy lines.  It may take an adjustment period but once you understand how this works in one piece of software, it's not that difficult to move to a different piece of software and figure out how they do it.

OTHER SOFTWARE:
Converting this all to MP3 or dumping to a CD may not be a feature found in music editing software.  Sometime sound bytes need a little manipulation and may require a 3rd party editor.  I like Sound Forge's Audacity for some editing.  It's easy to use and free.
Not all music editing software will convert directly to MP3. There are some legal issues with respect to music distribution and converting purchased music from its original format to mp3.  Not an issue if we are converting our own music but finding decent software can be difficult.  Personally, I use a tool that is part of the DVDSoft Free Studio collection.  There are a few tools from this collection which I use from time to time but being free and being a large collection can be a problem.

FINAL NOTES:
I tend to use an effects pedal and loop a few bars, play around with some leads, and possibly some bass ... even keyboards.  I'll put the mic up to the guitar amp and play this into the editing software as one track.  This is just a temporary track.
From here I'll get some idea as to the time signature and tempo and then lay that into the editing software.  This sets up a grid which allows me to snap sound bytes to a known beat.
At this point, I like to add percussion. I don't own a set of drums so I have to fabricate this.  Rather than use VST plugins, I import drum sound bytes.  I had to spend some time online learning on how to play drums so that I could understand when to use the snare, kick, base and hi-hat, for instance.  Another learning experience.  Sometimes this part consists of 6 tracks since I like to keep the various drum parts separate.  Much easier to change one part, if I need to.
Once I have the basic beat figured out, I'll loop this until I get to the "turnaround" or next section, possibly the chorus.  I'll add this to the loop and then I can extend this pattern over and over.
Once the beat is laid down, I begin the process of adding a proper rhythm track, then a bass track, a lead track and possibly some keyboards.  Once I listen to the whole thing altogether, I may add more percussion, some vocals or maybe add in some background sound such as a thunderstorm, birds singing ...
The next step is what I consider the most important part: put on the engineer hat and balance the various tracks.  Make sure lead riffs and vocals stand out when they are meant to.  Add fades.  Add pans.  Add effects.  Listen CAREFULLY for mistakes.

Have fun!!!
To get some idea about what is possible please listen to my music on SoundCloud: www.soundcloud.com/rick-engler