The iPod solution is viable. I use a 4th gen iTouch with a program called 
iProRecorder (99cents !!). There are over 500 recording apps most under $3 
available. I stopped counting after the 3rd page!
Last week I was at Kingsland Bay State SP and heard a sparrow singing. The 
bird was about 100 ft from me and I recorded the song with the iTouch and its 
internanl microphone. I listened to the recording and it was amazingly clear.
I did get an external microphone called MityMic (model TMC-012) at a cost of 
$30. I did some tests in my office and it did very well. I will try this mic this 
weekend outdoors and see how it performs. The mic comes with a wind screen 
so it should perform better than the internal mic.
This is a very portable recording solution that is easy to use and produces 
good audio recordings. Also I have other apps in my iTouch that are very 
helpful while birding like BirdTunes ($9.99- 2400 tracks with waveform display 
for 674 N.A. species by Lang Elliott), iBirdPro ($14.99- info/photos/calls for 
924 N.A. species), BirdsEye ($19.99- real time sighting locations & maps), 
Birdwatcher ($9.99) or My Bird Obs ($2.99) for keeping track of your life list 
and sightings.
The other option is to use a dedicated digital recorder from Sony or Olympus. 
You can spend from $60 to $400 depending on what feature set you like. 
Staples, Radio Shack, Best Buy has a bunch of them. The iTouch software has 
some features like emailing or posting recordings that are not tipically 
embedded in the software of the dedicated digital recorders.
If you want to isolate the sound source (bird) you will need a special type 
microphone like a shotgun microphone or a cardioid or electret condenser mic 
with a parabolic reflector ( like a Telinga). Now you are adding significant 
cost. You can also make you own, look at this link:

http://www.ukuleles.com/SaddleRoadBirding/Birds/soundrecordhowto.htm


Here is a link to the photo of the iTouch with the external mic and the 
iProRecorder software running:

http://www.flickr.com/photos/febco1/5558832269/

I would like to find out how to host an mp3 or wav file so I can add a link here 
so people can access it. I have a sample recording of grackles and RW 
Blackbirds in my backyard that were about 100 ft away. Ultimately it would be 
great if I could add the sound file to theFlickr  photo in the link above. Is it 
possible? Thanks.

Fernando