Yeah, Jason; the pre-outs are intended to feed directly into an amplifier section(a few receivers have inputs that feed their amplifier section directly, bypassing their pre-amp section)rather than another pre-amp. The CD input leads to the pre-amp of the Sherwood, so you have two stages of pre-amplification in tandem. Since the Denon pre-amp has a gain of four or more times for the voltage coming out of the player, the Sherwood has to pre-amplify that higher level, which can result in distortion if it has to output perhaps four times the contemplated voltage. The solution, as you found, is to turn down the Denon level control to reduce the player voltage which it pre-amplifies. You apparently came close to what's sometimes termed the "unity gain" setting. For example, if the gain is four times but you turn down the level control far enough so that only 1/4th of the player voltage is let through, the net result is that the output voltage is the same(unity)as the input voltage from the player, despite the four times gain. A little bit of distortion is added in the process, but it's very low and the Sherwood CD input then receives the sort of CD player voltage which it can amplify without audible distortion.
Sat, you may have misread the 663 manual on that point. The pre-outs have the same signals(e.g.,the same musical content)as the corresponding speaker outputs, but the levels are greatly different. As mentioned in the previous reply, the amplifier section which feeds the voltage to the speaker outputs adds a voltage gain on the order of 30 times the voltage which the pre-amp feeds to the pre-outs.
