This is one of those features that has gone away and come back from version to version of Mac OS. Frankly, I don't know what the current state is and I'm not sure exactly which versions of the OS in the past few years have messed with it.

What you're looking for is a "monitor" or "play-through" feature. There used to be a check-box in the Audio-Input prefs to turn on this functionality. This would play back the input source. There's definitely no such check-box in 10.5.6

It should be easy for a third party program to turn this on as well as provide mixing capabilities however. Something with a little unobtrusive control in the menu bar would probably work very well for you.

Have you taken a look at the products of Rogue Amoeba to see if anything fits the bill?

And one does: Line-In will do Play-through.