I had much the same problem as the original poster. Its now solved at last -- and it had nothing to do with bad drivers...
My screenshots are in German, but the layout is the same as for the English dialogs, so that should be no problem.
In my case, there's a TS22 PCI sound card plugged into my computer, and there is a physical cable connecting it to the amplifier/loudspeakers/headphones I actually hear. This is the Playback/Lautsprecher (TS22 PCI) device. So there are two Loudspeaker devices in the Sound/Playback tab.
Recording/Stereomix (Realtek) gets its input from Playback/Lautsprecher (Realtek), but only if that device is set to be the standard device in in the Playback tab.
My biggest problem was that I couldn't set Playback/Lautsprecher (Realtek) to be the standard device, because it was "not connected". To solve this, I plugged an old set of earphones into the green audio plug on the back of my computer (as suggested in one of the posts above).
Okay, so now I've set both Playback/Lautsprecher (Realtek) and Recording/Stereomix to be the standard devices. (And Stereomix is getting input.)
The next problem is that I'm not hearing anything. To solve that, I set Stereomix to echo its input to Lautsprecher (TS22 PCI).
I record, using Audacity, with its audio output set to Lautsprecher (TS22 PCI), and input set to Stereomix (Realtek), but I can hear the TS22 PCI loudpeakers even if Audacity is not running.
If I plug a microphone into the pink audio input on the back of my computer (next to the green plug with the unused headphones), its input is sent to Stereomix, overriding Playback/Lautsprecher (Realtek).
[Edit] Careful, there's a danger of feedback!! Don't plug a microphone in if it is going to hear the TS22 PCI loudspeakers! That means turn the loudspeakers off (at the amplifier) before pluging a microphone into the computer. The microphone's input (=Stereomix) can still be heard on headphones plugged into the amplifier.[/Edit]
Easy, if you know how!
All the best.