OK, tried Audacity and it didn't work either. However I googled some info about Audacity and there are some changes in Windows later versions. In control panel, under sound, under the recording tab, you need to right click and display disabled devices, then enable the Stereo mix device, then right click it and set it as default, and also communications default (2 different settings). Doing the above gets Audacity recording and playing back.

However Realband (and Powertracks still have troubles). From a fresh start, Realband was able to record - once! trying to play back that recording fails with 'unable to open wave device'. Subsequent recording attempts fail with the same error.

I admit, my understanding of Windows 7 sound is very limited, but I can't seem to get this working.