Audio Input Distortion Even Under 0 Db

[Brushfire]

I have a Digi 002 Rack, G5 dual core mac, OS 10.4.8, 2 GB RAM, PT 7.3.1 with the Pro Tools LE 7.3.1cs2 for Mac OS X update.

Yesterday while recording a miked acoustic guitar, I noticed that the signal in the headphones was distorting/clipping. This reminded me somewhat of the earlier problems with 7.3 when it first came out. I trashed the preferences and databases twice already and the problem still exists. If I turn the gain up on the 002 input to try and get the input signal loud enough without clipping, any setting of the gain knob higher than 12 O'Clock seems to start generating the distortion. At 12 O'Clock the green audio track indicator isn't even halfway to the clipping stage. It also seems to be dependent on where the input fader is set too. Fader settings just below 0 Db is where it starts and it gets worse as the fader is set higher. This never used to happen before.
I used to be able to push the fader on a vocal or other instrument above 0 Db so the singer/player could hear it better, but now it has this digital distortion. I didn't do anything different with my mic setup and I'm using the 002 phantom power like I have always done. I set up a stereo track for our FP-8 piano and the same thing happens. The output volume on the FP-8 is set to 8 which is where I've been recording it for years with no problems. Now it distorts.

I also noticed that when my wife played the FP-8 while testing, the master fader didn't show a signal at all. I have no plug-ins inserted in either the recording track or the master fader so all the audio coming through and out is unprocessed.

I still have my old 001 and at first I thought the mic and/or the headphones or headphones amp may be the problem. I changed the audio cable connected to my headphone amp and it was still distorted. I direct connected my headphones into the 002 it still distorted. I connected the mic and the headphones to the 001 upstairs and the signal was fine.

Software bug? Am I going to have to go through the agony of re-installing the software?

[Brushfire]

Additional information:

The distortion doesn't seem to be appearing in playback, so maybe it's a software issue regarding headroom of the digital audio signal while recording and monitoring?