I forgot to say, also download the LAME MP3 encoder, which will allow you to Export your audio as an MP3 file when you record it with Audacity.
Open Audacity, press the record button then play the audio you want to record, then go to File > Export as MP3. You will be asked to choose where the LAME dll is, navigra to where you downloaded it and choose it (unzip it first).
Thanks again Maj, I'm a little confused now. I have a Sony Vaio NR11ZS, that I bought in January this year. When i click record i get the following message - Error while opening sound device. Please check the input device settings and the project sample rate. Any ideas?
In Audacity, go to Edit > Preferences > Audio I/O tab and make sure "Channels" is set to 1 or 2. Set the recording Device as "Microsoft Sound Mapper - input". Click OK. On the main Audacity screen (bottom left) make sure the "Project Rate" is set to 44100Hz or 48000hz, click on it to change, if needed.