With windows XP, recording source choices such as "Stereo Mix" and "Mono Mix" are apparent and readily available. Starting with Windows Vista, these choices are "hidden" by default. To enable them you need to unhide them and then enable each device you wish to use.
1. Right-click on the small volume control icon in your Windows task bar and select Recording Devices.
2. Right-click in the list of recording devices and select "Show Disabled Devices."
3. Right-click on Stereo Mix and select "Enable Device."
See this short video tutorial which shows exactly how to accomplish this. View Tutorial here