Is the microphone audible through the speakers as well?
I assume you are "loopback recording" from the Stereo Mix or What-U-Hear inputs - it sounds like you've already checked the mixer though?
Try loopback recording from the WAVE/MP3 source, if it will let you - My SB Live does!
Is it the standard Windows mixer panel, or one from the soundcard?
Other lines of attack are to buy "Total Recorder" -
www.highcriteria.com - which can rip the decoded stream as it hits the sound card, or other avenues of ripping the stream and decoding, or ripping the output - an alternative player such as Winamp, with input plugins and diskwriter output may be another possibility, although I'd expect it to be blocked.
Also depends if you want to listen and record, or just record.