Sony is notorious for producing portable equipment that easily overloads in the front end. I do not know about your particular unit, but on the older PCM-M1 and many other Sony recorders, you want to use a gain setting of between 5 and 10 on the level control. If you have to go down to 1 in order to avoid clipping at the input to the A/D, you are amost CERTAIN to be clipping in the front end. In that case, you need to use a less sensitive input for your signal. Most people use the line input for their external mic signals.
Sony corrected this issue with the M10. Guysonic reported that if the level control is at around 1 or above and the meters are peaking below 0 dB, you will not get brick wall distortion. If the M10 is set exactly at 1 it is certainly possible he brick walled, but not at all certain.