I do something like this (sermons) and I use Kristal - it's free for non-commercial use and allows multiple tracks more easily than Audacity - but doesn't allow edits on a track so easily.

2) What you want to do is set your recording source as "Stereo Mix", on Vista you want to right click your speaker icon, choose Recording Devices, and pick Stereo Mix (click Set Default) - unless you're a victim of the plan to block users from stealing music, then it'll not be there. Otherwise, OK those settings and you're good to go.