Interesting news about my audio issue...
I finally called Apple Support after googling around for similar issues and I couldn't find anything. I thought that I might have a hardware problem, but it turns out that my Mac works perfectly. One of the advisors I was talking with told me that the audio jack on the newer MacBook Pros (with the dual Line In/Line Out port) cannot simply have a 1/8th stereo audio cable and it reading as "Line In" under the Sound pane in System Preferences. He said that for whatever reason, Apple removed the option to do that.
He told me that my only option was to use a USB sound card with a Line In port on it, because that will show up under the Input tab in the Sound pane in System Preferences.
Then he said that this was something that the engineers could work on and told me to fill out a formhttp://www.apple.com/feedback/macbookpro.html and if they get enough of these feedback requests about the Line In issue, they might consider making a fix for it. I asked the advisor if they actually read these requests, and he said that all of the teams have to read these requests.
So in the meantime I ordered a USB sound card so I can record sound coming into the Mac.
So it would be cool if everyone could go to MacBook Pro Feedback and request to have the option to select what the Audio Input can be used for, then maybe they will consider making a fix for this issue.