there should be buttons sayng: record win7 sound
and record external outuput (the tab below displays the microphone it will use)

tick those and there you have it...

just tick whatever is in the red box in the picture

I would recommend recording your microphone with audacity or some other program. That way you can adjust your voice and game voice while you edit. You also prevent the complete loss off episode.

For instance me and my friend were just doing lets play together recently, we recorded good roundabout hour and turns out his footage was missing audio. His microphone was recorded with fraps along with game audio. Therefor we lost entire thing, if his commentary would have been recorded in seperate program I could have saved the lets play, now all we have is my fraps video (with audio), my commentary and his video but no audio or commentary.

Your fraps is old version and doesnt seem to has such feature. Trust me you are better off without it. Audacity is free program you can record your microphone with and it doesnt hinder the gameplay at all, espesially if you compare it to fraps.