System Preferences -> Dictation & Speech
This covers the computer reading things out loud, along with real dictation. You still need a decent microphone, and a quiet room would be helpful. I tested it with a decent webcam mic one evening, it was surprisingly accurate.
System Preferences -> Accessibility -> Dictation (in left-hand pane)
This covers voice commands. If you turn it on, there is also a checkbox to "Enable advanced commands" for greater control. The more commands you enable, the greater chance of dictation errors, since commands might be parsed out of your dictation stream.