Then go back to Sound / Input / Choose input device and select Stereo mix from the drop-down list.
Under the Input , choose your device you will see Device properties. Open it.
You should see a dialogue box open with Stereo Mix Properties.
Go to advanced. Select the sample rate and bit depth required.
In Exclusive Mode make sure both 'Allow applications to take exclusive control of this device' and 'Give exclusive mode applications priority' are ticked.
I'm sorry, I don't understand, Stereo mix is the only way to record internal audio unless you have a separate audio card. Or are to trying to record line out onto an external device?