OK, this puzzled me for a while but this is what I did and it works spot on.
Pretty obvious stuff really, not meaning to patronise anyone, but as I said it took me a week to get it going!
Mute line in by checking the box in the sound control thing (or double click until red in mixer in media car). Then you need to turn ON line-in for recording (I *think* this enables the WA plug-in to work) Go to 'Sounds' in Control panel, hit the audio tab, now in the 'Sound recording' bit hit volume, now make sure line in is ENABLED, i think in XP this means checking a box and in 2000 unchecking. Just read weather it says 'mute' or 'enable'. Worked for me.
Several people (some 'pros' too) are reporting this prob so it is possibly a more complex issue than this, just thought its worth trying to help.