I found a "real" microphone, one that came with my 5yr old PC
Here's a file recorded with these settings.
Input Volume 80%
Voice recording format: 16,000Hz, 16bit, mono (256kbps)
This file sounds a lot better.
Also I noticed that voice recorder takes some time to load, because it parses the filesystem for sound files before allowing the user control over the program.
EDIT: A better microphone with windshield and correct distance between mic and person speaking, should make this kind of recording sound better.
EDIT2: These two files are my "First" recordings, and thus a "New" folder was created by "Sound Recorder"
It's here on my C3100
/Documents/Recording_Files/
on a C3100 this directory is on the hard drive.
/hdd3/Documents/Recording_Files/
symlinked to
/home/zaurus/Documents/Recording_Files/
EDIT3: If your mic and connection are working properly, you should see this RED bar in the Voice Recorder interface, while making a recording.