I'm gonna guess it's a level problem. Are the recorded tracks low in volume and require cranking up to hear well? If you have low levels you are not using the full resolution of the ADC (analog-to-digital converter) and it could cause it to sound muddy, as well as noisy, since the difference between the inherent noise level and the signal level is less than it is when you record at proper levels.
Check the Window mixer utility and be sure that the Line In is enabled for recording, not just play playback, and that the What U Hear choice is
not selected for recording. If that's not clear to you, take a short look at this article on the Cakewalk website:
http://www.cakewalk.com/Support/Lessons/WindowsMixer.html
Once you're sure it's enabled, adjust the input level sliders, again for recording -- it's independent of the level setting for playback (in the case of the Line In, "playback" is a bit of a misnomer, it's really the level for monitoring of the signal that's coming into the Line In).
If that's not it... one more wild guess -- are the Environmental Effects enabled on the SB Live? I think they are either on for everything or off for everything. While they sound OK on the MIDI synths (making them sound less sterile) they might cause POD patches to get muddy. Since the Line In "playback" volume slider is for the signal from the Line Input, before it's send through the SB Live (actually I'm guessing here, graping at straws), perhaps that's why it would not be noticeable when you play but comes out recorded that way?