It's the same thing with pretty much all the audio interfaces I have. You can't hear it through the soundcard because the input drivers are ASIO and won't allow you to run the output through DirectSound. Not sure if Macs can do it as I don't have a Mac.

To record, you need to grab some recording software (that's why it was bundled with Ableton Live.. but I didn't like that package).. for example, Reaper, and then tell it to use the input from the interface. I'm sorry to hear you had so much trouble with it.. have you tried downloading Reaper and then recording into it with only the USB connected? I don't need to route anything via RCA cables. The headphone port is for monitoring the sound while you work.

It drove me nutso trying to get it to output via DirectSound but I am used to it all now and I don't mind that it doesn't do that. I bought some decent powered monitoring speakers as a work-a-round but I find that I actually prefer to use the headphones because I can be as loud as I need to be.

My usual setup goes: Guitar {StealthPlug} USB Port. I have Reaper running, with audio settings set to input from StealthPlug and output via StealthPlug. In Reaper I use the Amplitube plug-ins the most to model the sound and apply effects but Reaper comes with a bunch of standard effects anyway; and there is plenty of free VST plugins around.

Getting used to Digital recording is a little tricky at first but I'm sure that if you endeavour with it, you will thank yourself later.