For Windows Vista
In Windows: Control panel - sound - recording - right click in the white area - select 'show disabled devices' - right click on 'Waveout mix' or 'stereo mix' - select 'enable'
In Audacity: Go into Edit - Preferences, then on the first tab where it says Playback and Recording, from the recording drop down list select 'waveout mix' or 'stereo mix' as your recording source. I would image you want stereo sound so select 2 channels from the list below it. Then OK.
try recording with it set like that.