Ok, so I've been doing this for about 20 years now.  And one thing that has always bugged me but I've never asked anyone else about....why do I have to max the input gain of my pre-amp, max the output of the pre-amp, lower the threshold of the compressor to almost nothing, and max the output of the damn compressor - just to get a flimsy signal that still sits about 9 to 12 dB lower than it should be?
 
Why do I have to max EVERYTHING, every pot, in every box in the freaking chain to unnatural settings...just to end up with a weak signal that couldn't clip if I beat the strings with a hammer?  (Not that I'm trying to clip, just a reference as to how low and disappointing the signal is).
 
I set my SM57 about a foot or so from the output port of the acoustic, and feed that into a small tube pre-amp (Art Tube MP) and feed that into a Behringer Compressor and then out to my Soundcard.  
 
Does anyone else have this issue?  Is this common, to have to max everything in the chain and still not get a juicy signal?  I have the same problem recording bass, direct in as well.  Same chain, pre-amp to compressor to soundcard, and again, I have to max every piece of that chain and still end up with a low, weak bass signal.  
 
Irritating.  

You need a condenser mic or a ribbon mic for recording acoustic guitar.
A mic like SM57 needs to be an inch or two from the guitar strings, and you can't keep the distance the same for longer than seconds, when playing.

The sm7 needs a lot of gain, as Kalle sez.  You need to 1. use a different mic; 2. get an outboard preamp w/ lots 'o gain.
 
Here at home, even w/ a limited mic cabinet,  I'd first try a small diameter condesor - in this case an Oktava Mc-012.  They used to be cheap, but you can find on ebay for $250.  That is about as low as I know for a sdc that I've used and sounds pro.  A good sdc is useful on all sorts of acoustic stuff, and female vocals, chorus etc.
 
If you don't need to record other stuff and the sm-7 works for you except acoustic guitar, I'd get a better preamp.  I've got the mp and it is OK (basically the same preamp design that is in every interface/cheaper mixer w/ a starved-plate tube hooked in there).  If you use the tube to up the output it gets pillowy (technical term) before crapping out.  Neither of which is optimum for acoustic guitar, I would think.  The first preamp that comes to mind that I know is the Focusrite ISA One.  80 dB of gain will stoke that sm7.  You should fine everything sounds better w/ it - vocals, and you can use the preamp and DI simutaneously (tho only 1 transformer for the preamp then).  It is kinda of a goldilock preamp, not too clean, not too colored even when pushed.  If you wait until Christmas Guitar Center usually has a 20% off so you can pick one up for $400 + tax.  There is also the Warm Audio preamp at that price range, which is just as good but a bit more vintage sounding.  Either of those would drive your dynamic mic and add a bit of transfomer roundness to your digital recording.  Neither one of them you'll get rid of even if you win the lottery.  There are other mic preamps, some cheaper, but I ain't used them so I can't comment on having enough gain.  But there is the GAP, Electro Harmonix which range from a few hundred to over $300.  Rane and ashley are cheaper yet, but check the specs for gain.  You need a lot for the sm7.

Acoustic has a weak level to start with.... and using a Shure SM-57, which is the workhorse of the working bands for stage use.... yeah, it's a good mic but not when it comes to acoustic guitars in studios...
 
You want to use a condenser mic with an interface which has some nice preamps and phantom power. It makes a huge difference in levels and tone as well.
 
Look at http://www.gauge-usa.com/Gauge_Microphones/Home.html for a nice quality mic at excellent prices. It's mail order so it takes a few days, but I have heard these mics side by side with ones costing 10x more and they compare favorably.... If I had not just purchased a Rode the month before, I would have picked up one of them.
 
 Edit: I still work on trying to get a good tone.... but placing the mic above the 12th fret, straight out and about 12 to 18 inches away form the fret board..... the sound is fairly decent and you don't pick up the boxy sound of the body so bad.

Hey guys, stuck at work and can't comment much but wanted to thank you all for the replies.  Much appreciated.
 
I have a KSM27 condenser mic, that I use mainly for vocals.  Since it didn't sound so good picking up my acoustic (to my ears anyway) I guess I thought all condenser mics wouldn't sound so good for it.  Bad assumption.
 
I will take your advise, read through your suggestions and give this a try.  I think I am putting WAY too much faith in the SM57 to do everything I need.  

It is really better to get a stereo pair of SDC condenser mics for guitar.  Check out soundpure.com for their great videos and demos of great mics, guitars, and recording techniques.  

Voda La Void
a small tube pre-amp (Art Tube MP)

You need a preamp with a lot of gain to get your signal up. The Art Tube is not that preamp.

A pair of small diaphragm condenser mics is not necessarily better. You may not get the bottom end you are after and possibly too much top end with new strings for example. Some SDC mics that do have the bottom end are something like AKG451 but at great cost. The stereo image is nice of course but it gets more complicated due the various stereo micing techniques available. Sometimes the stereo effect is more trouble than its worth in a complicated mix. However for something like guitar and vocal only it could work very nicely in your favour.
 
A simple and effective (modern music approach) approach is to use a single large diaphragm condenser mic about 18 " from the 12th fret and will always yield a great result and cost less.  Most preamps will have the required gain to get a decent signal into your DAW as well. The mono recording will also be easy to place in most mixes especially that involve a few other things. Evan a mic like a Rode NT1 will do the job very well at minimal cost.
 
I think it is interesting that there may be two very different approaches to say recording an acoustic guitar and it is easy to think that it is because of two people having very different opinions. I think there is something else involved and that is the perspective from which they may be coming from and that may not be clear. For example an engineer involved with mainly recording classical music will tell you the only way to do it is to use two microphones from 15 feet back in a hall somewhere. But an engineer who is involved with a lot of modern production will tell you record it up close 12 to 18" from the 12th fret in a dead environment and put some nice reverb on it. The classical approach is not going to cut it in terms of modern production and recording it up close is not going to work very well in a classical situation either.
 
It should be noted though that a great percentage of the approach around here will have the emphasis on modern production and that needs to be taken into account perhaps before offering advice that while may suit classical production is definitely not going to work in a modern setting. Some of us though have done a lot of both and I tend to pick the best approach accordingly.
 
As long as the OP makes it clear too and in this case he has not exactly stated in what setting and what style of music he wants the acoustic guitar to be involved with. At this point both of these approaches are very valid. Once it is known then the best approach will be obvious. 
 

<devils's advocate mode>
 
Most of the suggestions requiring new equipment are accurate, but possibly not immediately useful<G>... if that makes sense.

I am not a big fan of the ART preamplifier, but I'm thinking you can probably get a better result with a little elbow grease.
 
Step one - ditch the compressor... sometimes a compressor can help smooth the rough edges, sometimes it can be used as an effect, but it is highly unlikely that it is necessary, and quite possible that it is fighting you.
 
Acoustic guitars are NOT quiet instruments, or at least they don't have to be, and all of mine can easily overload the amplifier in a condensor microphone with very little effort!
 
And finally, there is nothing wrong with an SM-57. It might not be my first choice for an acoustic guitar, but heaven knows I've recorded some decent tracks using an SM-57, and more to the point, doing so taught me a LOT about recording. One of my mentors (whose name you would certainly recognize) used to brow-beat me to remember that the first equalizer and compressor in any recording is the selection and placement of the microphone(s).
 
So let's tackle this from the top, using just the equipment you have...
 
Start by listening to the guitar - not meant to sound mean, but really listen to the guitar. If you can get someone else to play it you'll have an easier time, but in either case, try to find a spot where it sounds like the sound you are trying to capture.
 
Now stick the microphone in that spot. Experiment with the distance between the microphone and guitar. A LOT!
 
OK, now that you've taken care of the important part it's time to worry about the levels, because something sounds hinky there. The SM-57 has a pretty decent output level, so you should have no problem hitting the clip point, which makes me curious<G>!
 
Can you try different cables between the microphone and the preamplifier, and between the preamplifier and the sound card? You may find that one of your cables is mis-wired.
 
Next up, find out if your sound card has a balanced or single-ended line input. If you connect a single-ended input to a balanced output you could lose 6dB of level... and that could be a problem. Also, make sure the preamplifier is working properly... while it isn't the best device on the market, the ART is competent.
 
Last thought... I use ribbon microphones, large and small capsule microphones, and moving magnet dynamic microphones (technically ribbon microphones are also dynamic) all the time, depending one what I'm trying to accomplish. And in fairness, my collection is sufficient for my purposes - but it has taken me 30 years to build the collection. (And I still want a pair of Schoeps CMC6/MK41s and a pair of KM-84s... there's just no satisfying some of us<G>!) My point... which I started with anyway... oh yeah... have fun with placement. One of the odder tricks I've learned is to place a microphone above my shoulder, at around ear level. The guitar sounds markedly different to the player and the listener, and sometimes you want to capture the players experience.
 
Two microphones is, in reality, probably better than one, but starting with one will teach you a lot. When you have two you can extend your experimentation by combining some of your favorite single microphone techniques.
 
Good luck, and feel free to ask questions...
 

For acoustic guitar, I get excellent results using my Zoom H2 portable recorder as a stereo line into my DAW audio inputs. Phenomenal mics in that unit.