do you have any sound enhancements enabled on the iriver (bass/trebble boost, EQ)?
I got told some sound distortion (on playback, when using EQ) popped up again lately, they are still investigating.
Also, it can be the levels you send to the headphone are too high?
And what is the fact that you recorded from a headphone-out got to do with the issue? Does it work fine when recording from another source?
Best check the recorded file on PC to see what's up with it?