There are two ways of fixing this. And it depends on your condition. My condition is that I'm using an IBM Lenovo G230 571, with Realtek Soundcard. Now, there are two more separate ways to do it. One for XP, and Vista. For Vista, you can try the solution given in a blog here
Before explaining the Windows XP, there's this unique way of cheating the setting through hardware by making a microphone jack, which the other ends to the speaker jack. Click here
for more details.
And for Windows XP in mid-end laptops, you can try doing this:
Open the Sounds and Audio Properties either through the Control Panel
Choose sound recording volume
Click option then properties
And then check the Stereo mix, OK and select the stereo mix
After this, scroll up to the image in the top of the entry, and try to check the "enable multi-recording" and it will show you error page. It's okay. Click OK and you'll see the output driver's name is changed! Now it's "Realtek HDA Primary Input" and it works with audacity or other wav capturing software!
I haven't tried the microphone, or tried calling. If you're reading this then you must have the similar problem, I spent 2 hours on going back and forth to the same page where I was told to go download something, and it didn't work >_>
If this isn't working for you, don't go far away from the options I showed you. big chances it's not working if you set the microphone in Master Volume to "Mute".
That is all for today, I have Mathematics homework to finish. See ya all and happy recording!