There are a few keys sound preferences that need to be examined in order to ensure correct (100%) recorded volume of Application Audio.
Sound | Output

- Check that the Output Volume is at 100%. Slide the volume back a little, and get it back to 100%. This will guarantee that the output volume is reset to 100% (we've had a couple of cases whereby it shows 100%, but is actually lower).
- Toggle mute. Make sure when you're done, Mute is disabled as in the picture above. Again, we've had a couple of cases where mute has been shown to be off, but in fact the system was muted. Toggling it fixes these cases.
Sound | Input

- Do the same check for Input volume. Check that it's at 100%. Wiggle the slider a little, and set it back to 100%.
Check Settings - via playing music in iTunes

- Start iShowU
- Enable recording of Application Audio
- Play some music in iTunes. You should get a reasonable amount of movement in the level meter.