Thanks for the clarification, wasn't quite sure where the problem was.

http://talk.maemo.org/showthread.php?p=441501 looks like it may offer some insight into some additional tools you can use at the terminal (pulseaudio-utils) to help you verify your set up. There may be other insightful postings elsewhere on this forum as well.

A quick read of that posting suggests you may want to be attatching to sink.hw1.monitor and not source.hw1.monitor but as I say using parec from the utils package should help you get up and running with this and verify the correct device setup.

If you end up going the GStreamer route I may be able to be more helpful.