Soundflower (also available from code.google.com) is a simple, free app that allows you to pass audio from one program to another. It basically masks as a virtual audio device. For example, if you want to record the audio from a certain video, you can play the video in VLC, iTunes or another player of your choice and send it to an input device or software such as Audacity or Max via Soundflower. Once installed, the Soundflower options are easily accessed by pressing alt/option and clicking the speaker volume button in the menubar. From there you have the option of changing the output and input devices. Another alternative is to run Soundflower Bed, which is just a menu app that gives access to more of the functionality. By making Soundflower both the input and output device it becomes your virtual microphone and speakers, effectively recording any audio output to the input device/software of your choice. Unfortunately, it is only available for Mac OS X.
An alternative to Soundflower that has received high ratings is JackOSX.