Hi Andrew, I've done this many times and the results are very good. However, I don't use the Panasonic Audio Recorder - I use a sound editor called Goldwave and it works very well. There have been a few comments about the audio level being a bit low to give reasonable levels for CD, but this is easily corrected when using a sound editor for recording, since the volume level can be increased while the signal is still in the editor.
With reference to your USB problem, do you have any other devices which you can attach to the USB port you are using, to test it's operation? (Printer, Digital Camera etc)Also, are you using the USB port directly from the PC or are you sharing it with any other USB device? Sometimes, you can get conflicts between devices. USB Hubs can sometimes cause problems.
Can you play a sound file on your PC and listen to it through the KN7000 via the USB connection? If you've installed the drivers according to the supplied instructions, then they are probably OK.

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Willum