I've got Vista, not 7, but hopefully there's some correlation. Sounds like you should not need the amp. You might want to check in your sound settings in Windows (Sounds/Preferences) and mess with your Playback & Recording options. It could likely be the recording options.

I had a similar thing getting my effects pedal working, both with XP & Vista. Had to frig around in there for a bit selecting sound devices. Sorry, I don't recall exactly what I had to do, it was one of those "get it working then never look again" things. I had exactly the same symptoms. Everything worked great, except no sound from the speakers.

Sorry I can't be more help.