No rush with this, come back to it tomorrow or whenever you have time.
I note there is a "Microsoft Windows 2000/XP/2003 HD Audio Patch KB888111" available on the web site.
Unfortunately there's no information about what this does, but it may be worth checking to see if it is installed.
The patch is in the "Utilities" section of this page:
http://www.asus.com/product.aspx?P_ID=J ... t=download (you need to select your OS first)
I'm also wondering if there is a setting in the Windows Control Panel to enable full duplex. This is a really weird audio chip - it handles audio over the USB bus. Have a look in the USB settings as well as the audio settings. Do you have any other USB devices attached?
What happens if you reset Audacity preferences, reboot the computer and run Audacity with all default settings?
Have you ever had Audacity 1.2 installed on this machine?