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OK, so I tested the iPod adapter on my Yamaha upstairs and connected it to a plain RCA-in with only the stero-in connections (Red & White). I ended up getting the same distortion & muffled sound. Even worse, when I touched the iPod I got some more distortion - like a live cable was unplugged and not grounded. Touching the adapter cable and moving the unplugged video (Yellow) cable did the same thing.

This leads me to believe that the adapter is somehow using the video-out cable, even though I'm only playing an audio song. I was under the impression that video playback was something in the future for the iPod. I guess the cables send some kind of signal, and the adapter doesn't fully ground unless it's plugged into an RCA jack - regardless of the RCA jack actually doing anything with it. It would be interesting to find out exactly what signal is being sent over video-out when playing MP3s on the iPod.