This is a directshow audio filter source that uses the loopback capture of windows vista+ to capture live audio.
I.e. it’s an open source (free) competitor to virtual audio cable, basically
http://github.com/rdp/virtual-audio-output-sniffer was the old url
Basically with windows XP, you could record “what you hear” by selecting stereo mix from your “recording properties” and voila, it would record (note: this option is only available if your sound card supports it, so not all XP users could do this).
With windows Vista/7, this is also an option–go to control panels -> manage audio devices -> Playback tab, right click and check the various “show hidden/disabled devices” and then select “stereo mix” again.
If that works then you don’t need my little program here, you are good to go.
Unfortunately this is only available if your sound card drivers support it, and most for windows 7 audio drivers seem to *not* support for this.
There is an answer–WASAPI Loopback recording is available on windows vista+ allows you to do essentially the same thing 
but using software only. This project attempts to create a directsound audio input device that “reads” from that source, i.e. basically allowing any directsound aware apps (ex: VLC) to be able to record what you hear. It works, feedback is welcome.
Some other options would be (you don’t need to do these, you can just use my program though):
buy a new (or another) sound card, or buy a physical cable and connect it from your headphone jack to your linein (or mic) jack, then use that, or purchase either http://www.shiningmorning.com/VirtualAudioStreaming/index.html or “virtual audio cable” (the former looks less confusing) or http://www.e2esoft.cn/vsc/buy.asp or the like.