Hi,

From your post, I'm assumming you are connecting your POD via USB to your computer and monitoring the sound through a DAW or something. Not sure what you mean by your tone sounds like junk, would be more helpful if you care to elaborate.

There's a few things that you can check though.

1) Check if you are using the right inputs in your DAW, if you're using the ASIO Pod X3 Live driver, there are a couple of inputs like dry inputs , tone 1 only and stuff like that.

2) For the crackling, this might be due to the buffer rate of your audio driver. You can fix this by increasing the buffer rate in which will result in a slight increase in latency.

3) For the dropouts, it might be due to the hardware problem of your POD X3 Live when its streaming audio to your X3. This is pretty common with the X3 live but not all, you can bring it down to a service centre near you to get it fixed. It should be under Line 6 post warranty fix, so I don't think you'll need to pay a cent, but you'll have to wait for the service centre to have the parts or something.

4) Try making an entirely new patch and see if it sounds like junk too.

5) Check if you have any other audio effects in the track of your Pod X3 Live like limiters or something ( Assumming you're playing through USB )

Hope this helps.