Sometimes the option Source (Auxiliary Input >> Options) does not correctly set which input is to be recorded. If this happens follow these instructions:
Select Start >> Run and type SNDVOL32.EXE -r
Select the recoding source from there and ignore the options page. Auxiliary Input should now record from your external source.
Select Start >> Run and type SNDVOL32.EXE -r
Select the recoding source from there and ignore the options page. Auxiliary Input should now record from your external source.