Hello. I have been having similar problems. I have a Pentium 3 IBM with windows xp.
A few months ago, everything seemed sweet. Then all of a sudden, not sure what I have done or what has happened, but I noticed that on newer version of msn, I cannot send voice clips no more, and programs such as Audacity, which use play/record audio audio using internal mic, but now no longer does.
I have tried fiddling with the volume options, as well as just tried the volume directions you have displayed, but not even that works....(that is asuming that it is the internal mic).
And no, mic isn't muted :p
Can anyone please help?