-I use a SBLive with Cakewalk Home Studio 2002: you should be able to do input monitoring, as well as duplex recording (playing one sound while recording another separate sound). You should be able to add additional tracks, while being able to hear all your previously recorded tracks, as well as what you're currently recording. You do need to be wearing isolation headphones.
-What you are doing is correct, as far as it goes: from within Cakewalk you select the soundcard, but you can't control the on-board functions of the soundcard itself, such as inputs or outputs. To do that, you have to either use the Creative AudioHQ Mixer software and switch to the line-in source, or use the operating system's audio control panel. -If the line-in doesn't appear in the operating system's control panel, you have to add it to the display by hitting "options" and then "properties". All the supported inputs and outputs should show up as options in the listbox. Enabling one audio input (line-in or mic) should disable the other, so that only one can be on at a time.
---Also do note that under some circumstances, the soundcard will not play anything unless all the inputs are muted......
-I don't notice any latency with audio input monitoring. The only real problems with lag occur when using soft synths. I don't run effects on inputs at all, but that's usually the other source of lagging or choppy performance.
~
-I gots a 1200T-Bird/256DDR/Win98SE, dunno if that's all that fast or not.