How Does Guitar 'Software' Work?

I think I got this figured out and I realize what a lame question it might be but sometimes there's so much that's a complete mystery. Any way I also have a Roland Cube 30x which has a 'recording out' that I ran into my Yamaha MG 12/4 mixer, into the sound card, and into an audio track on Sonar.

Recorded using the clean guitar sound and it came out all right. Then I used Sonar's Amp Sim FX which is pretty lame but I suppose the good amp sims like Guitar Rig or Amplitube work the same way and effect the recorded guitar from the FX bin. I realize this ground has been covereed many times but is this an OK signal path to follow?

line out so on amps tend to be ok for clean stuff but really bad for distorted sounds. you have a couple of options here. one would be to mike the amps, if you like the sound they create, use a dynamic mike about an inch or so away from the speaker, something like an sm57 is the industry standard, you can also use a condensor mike a couple of feet away (need to watch your decibel level) to capture a second slightly different sound, this can give a bit of 'air' and by blendin the two sounds gives you more options at mix down. the position of the mike in relation to the speaker makes a massive difference to the sound, so experiment.
the other option is to get a small DI box (as your Yamaha has no instrument (hi-q) input), they can be bought for very little money, and go thru your mixer into Sonar to use with an amp-sim. There are loads available, including free ones such as FreeAmp3, and the ones made by http://www.acmebargig.com/ which are particualarly good for freebies. check out studio devil too. of course, then there are the big beasts such as Guitar Rig 4, Amplitude 3, Revalver, Waves GTR. if you click on the link 'Dies Irae' below, all the songs are made using guitar rig 2 or 4.
you can use the out from your Cube to take the role of the DI box, but it is going to be coloured in some way no matter what you do. given that a passive DI box can be bought for less than $20. that's what i'd do!

usb 1.1 or 2 makes no difference to latency, it is about the amount of data that can be sent at one time ie number of simultaneous tracks. only better drivers can affect the latency, usb is notorious for having more latency than firewire or pci. with the line 6 you can monitor direct and so avoid this. even so, you shoujld be able to get down to a reasonable setting using usb.
if you still want the lowest latency you'll have to switch to firewire or pci(e) or fork out for the rme fireface uc which is usb but has a new driver model.