not sure what's going wrong. It's not detecting your soundcard or the soundcard is busy and so audacity cannot connect to it.
This also happens to me and the sollution is to close down the app or demon that is acessing the soundcard. In my case this can be on e or several of the following:[list=a][*]esd[*]artsd (when I have used a KDE app)[*]evolution-sound-server[*]xmms (if reproducing or paused)[*]thunderbird (because of the beep after receiving new mail)[/list=a]
There may be other apps that can cause the same problem, but these are the ones I have found to be the culprits on my system.
Shutting them down solved the problems for me every time.
However, I have read it is possible to use audacity in conjunction with artsd.
Check out the entry on sound servers at the
this page of the audacity wiki.