funny, I had the EXACT same problem once. Was using a Creative Audigy 7.1 sound card. I had to go into the Audigy settings and be sure it was recieving as Line in and then into MS properties and do the same.
If you Y-Adapter is marked with little " S " on the two lower jacks then you have the correct plug. I did find I had to reboot the PC a few times with all the audio running and somehow it just went poof and worked.
While I am not a feed provider on this particular website anymore, I really REALLY! recomend you spend the cash and get a dual stereo sound card.
Bogen Communications | SAX1R Unbalanced Stereo Input | SAX1R for example. It really makes a difference.