> It seems to me that there is some non-linearity in the audio stages that
> sets in at a fairly low level. I'm not an expert either, but might the
> isolating transformers in the line output be the cause of this?

Yes, see Jack Smith's work on the topic

http://www.cliftonlaboratories.com/non-linear_transformer_behavior.htm

...and the link to a fix that offers better performance:

http://www.elecraft.com/K3/mods/K3_AF_Stage_Upgrade_Instructions_Rev_B.pdf

It appears your K3 has not yet been modified although don't expect a 
complete elimination of distortion products through the K3's transformers. 
The problem is not lmited to the K3: distortion produced in small, datacom 
transformers is dependent on the source impedance preceding the input to the 
transformer.

Some folks, like K9YC, advocate the elimination of the transformers as long 
as you're reasonably careful with your audio interconnection practices.

Paul, W9AC

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