For Jaunty 9.04:
There's no longer any need to start Audacity with padsp, so remove this again from the Main Menu using System -> Preferences -> Main Menu if you had changed it in 8.10 and then upgraded to 9.04 automatically. Otherwise there should be no need to change the start-up command for Audacity.
Open up 'Applications -> Sound and Video -> PulseAudio Volume Control'.
* Open up the source of the sound, e.g. Totem music player or a web page that plays audio. Once the sound starts, pause it and go back to the start if you can.
Go back to the Playback tab of the PulseAudio Volume Control. It should be showing the sound stream. Right click, choose Move Stream and point it to the stream that you listen on e.g. 'USB Headphone set'.
Open up Audacity and select 'Edit -> Preferences'. In the 'Audio I/O' section, de-select the two checkboxes under Playthrough. Under Playback, choose Device: ALSA: pulse. Under Recording choose Device: ALSA: pulse and Channels: 2 (Stereo). Click Ok to save the changes, then close down Audacity and open it up again.
* In Audacity, click on Record, and then Pause.
* Go back to the Pulse Volume control and look for the new entry for Audacity on the Recording tab. It will probably be called 'ALSA plug-in [audacity]: ALSA capture'. Right-click on the stream, choose Move Stream and then select the Monitor for the device that you listen to e.g. 'Monitor for USB Headphone set'.
* Release the pause in Audacity and start playing the audio. When the recording has finished, press stop in Audacity and remove and superfluous sections at the start and end of the track using Audacity's editing features. Then export as an MP3 file.