I have not used external sequencer programs much, but I recall I got it to work using the USB cable. I could record and play back.

I can also record wav files using the USB cable, and have made lots of mp3's too. Some of them are avaiable from www.KN7000.net

So my guess is that your USB driver isn't correct installed. Have a look in this thread: http://www.kn7000.net/fusion_forum/viewthread.php?forum_id=2&thread_id=11 - and read the manual (available for download from same page) carefully. Especially it's very important from point 10 in the manual.