Get an external sound card (aka USB interface) like Line 6 Toneport and M-Audio Fast Track (thats what I have). They plug into your USB bus ports and you can plug your guitar/bass/drums/microphone anything really into these and record in Audacity. The M-Audio and Toneport both come with effects software so you can get some nice tones.
Pluging guitar direct into these isn't really great recording quality and the tone may sound computerized. It would be much too get a decent Dynamic Mic (like Shure SM57) and mic your amp (if you have a good tone already). To do this plug the mic into the mic input on the box and place it on a stand in front of your amp speaker (10-20cm from center of the cone) experiment with it in different position.
With this set up you are bound to get good quality.
If you insist using a computer mic-->line in set up then make sure to record at low volume until the final mix and then amplify it. This will loose some feedback/distortion (muddy sound) but not all. This isn't really the best way to go though.
hope this helps
Im not ok. Im not okhayhay. Im not ok.
Im not O f****n K.
Im not O f****n K.