Make sure that you are lowering the microphone volume under the Recording Control properties and not Playback Control properties.

By default, the volume control dialog box displays controls for playback. To switch to recording controls:

1. In the volume control box, point to the Options menu and click Properties
2. Select the Recording option
3. Click Ok
4. Under the "Show the following volume controls" list, check Microphone

You can try turning off Microphone Boost to reduce static.

To do so:
1. Open the Volume Control.
2. On the Options menu, click Properties.
3. Under 'Adjust volume for', click Recording.
4. Click OK.
5. Click Advanced.
6. Under Other Controls, uncheck the Microphone Boost option.