You can choose a specific process that you want to record, or set up some automatic recording when the process starts emitting sound.
You can record your Skype conversations, podcasts, internet radio shows, live perfomances, youtube sound, Winamp.
Audio spy uses a specialized audio driver that taps into the sound stream and creates a copy of it for you.
There is no need to setup loop back lines, or special audio lines. The software just picks up on the existing hardware and listen to it.