OK, after messing around a bit more I got Audition to record AND monitor the signal coming into the MIC jack (monitoring is always a bit complicated on a new installation of Audition) but Line-In just records static even though the meters move.
In Adobe Audition 2.0 you have to make sure Monitoring is set to Audition Mix instead of External if you want to hear what your recording.

Vista Sound Recorder records the signal from the MIC jack but I can't hear it while it's recording. Line-In does nothing.

I've come to the conclusion that Line-In just doesn't work in Vista yet and it probably has to do with the drivers being so unfinished.
Audition and Sound Recorder don't even know that the Line-In exists.

One good thing is that I can apply effects in real time and they seem react quickly. Maybe the latency is better in Vista.

Here's a screenshot. Notice that [01S] Microphone is the only input available, all the meters are moving (I could hear it too) and in the bottom right corner Monitoring: is set to Audition Mix.

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