Check that your recording settings aren't muted.
1. Open - Volume control (under Programs - Accessories - Entertainment)
2. Pull Down - OPTIONS menu, then select PROPERTIES
3. Select - Recording - then be sure your "LINE IN" is selected
(if you are useing the "LINE IN" on a Live Drive or Live Drive 2 it will "LINE IN 2"

4. Click OK - check settings
My guess is that you will find that your Recording setting for the "LINE IN" is muted. If you have never changed these settings before it will be muted (it is "muted" by default upon software installation)
Hope this helps.