Sound Recording does not work

I have a headphone set with microphone attached. I can hear music very well.
But I am not able to record my voice.

Also when I talk to someone on MSN or Yahoo Messenger, I can hear the person
I call, but she can't hear me.

That is when I tested the funtion in Start>All Programs>Accessories>Sound
Recorder. I notice that nothing is recorded.

I am sure that the speakers and the mircophone deviced are not muted. I even
checked the device drivers. I got the message that the latest are already
installed.

Someone please help.