We starting doing this a little while back, and here's what we ended up doing with good results.
First, you need a decent camera and a tripod. Nothing super, but good. 4MP is sufficient with a high quality lens. Most Nikon or Canon 4MP cameras are sufficient. You don't need a SLR for product photos, but you do need a tripod.
Now the hardest part is the lighting and back-drop. Go to ebay and find a light tent that is big enough for what you are wanting to photograph. Usually they come with several background colors. Personally, I like white the best, but black is very good as well. Blue, green, and red photograph well, but just don't look professional in my opinion.
As for the lighting, you need a lot. For a 24 - 26" light tent, I would suggest a minimum of 4 super-bright compact fluorescent spot lamps. 6 is better but 4 works. If you are really good with photoshop, you may be able to get away with 2, but I highly recommend 4 or 6. I would consider myself very proficient in photoshop, and 2 lights was nearly impossible to get professional results with. You can also purchase these lights on ebay, usually in the photography section. Make sure you get compact fluorescent bulbs that are around 5300K color temp. Higher is too blue and lower is too red. Normal fluorescent or incandescent lights will make everything look yellow and nasty.
Basically you now just need to setup the light tent and back-drop. Iron the back drop sheets so there are absolutely no wrinkles. These will make shadows that are a pain to digitally remove. Put the camera on a tripod, turn the lights on and experiment until you get what you are looking for. Try with and without the camera flash. It shouldn't take long before you get exactly what you're looking for.
You may need to adjust the levels,brightness, and contrast in photoshop, because the images are initially washed out and overexposed.
This setup will get you professional looking photos.
Example (excuse the watermark):