From the Audacity Help FAQ:
Windows and LinuxIn Windows 2000, I set the Audacity Mixer to record from Wave/DirectSound and adjusted the Wave volume in the Play Control to give me a nice hot signal without clipping.
With most Windows and Linux audio devices, it is possible to record whatever sound the computer is currently playing, including internet radio streams.
In the drop-down menu on Audacity's mixer toolbar, choose “Wave Out” or “Stereo Mix” as the input source. (The exact name may be different, depending on your computer's sound drivers.) When you press the Record button, Audacity will capture whatever sound is playing on your computer's speakers.
If this doesn't work on your computer, you can instead use a cable to connect your computer's “Line Out” (speaker) port to its “Line In” port, and use Audacity to record from Line In.
Nice, quick and easy! I can see this being quite useful in a number of situations.