It's not broken that's how it is supposed to work. From the manual:
9. Out 1 Normal (Dry) Jack
Use this output when only one amplifier or mixer channel is used.
When both Out 1 Normal (Dry) and Out 2 (Effect) are
connected, only dry, unprocessed guitar signal is present at Out 1
Normal (Dry) when the Synth Wah is on or bypassed.
10. Indicator LED
This LED indicates when the effect is turned on. If the LED
becomes dim or does not light when the cables are connected, the
battery needs to be replaced.
11. Out 2 (Effect) Jack
Connect this output to a second amplifier or to a mixer channel for
effect signal only. When Out 2 is connected, only effect signal is
present when the Synth Wah is turned on. Out 2 is muted when the
Synth Wah is bypassed.
Here's a link to the manual: http://www.harmanpro.com/images/media/XSWV_OM_EN.pdf