I'll assume the distortion happens during line-in playback, and not recording, though I'll test both soon. The drivers for the X-Fi give the same problems that any other of my cards' Creative drivers did, so I won't be too surprised if this happens on my card as well. I just looked in another one of your recent threads with your dxdiag log, and your sound drivers are dated '03, and there's October '06 drivers out for your card, so updating your drivers might fix it (
http://www.soundblaster.com/support/).
Can you give audio examples (recordings)? Distort could mean lots of things in your context.
Also, you said this happens when you play Graal Kingdoms. Do you mean that's the server you play, or that's the only server that causes the problem?