Audio Systems: home audio, digital capability, crossover frequency

Question
i recently built a home and intalled some JBL SP8C In-Ceiling Loudspeakers (I inlcuded the specs below) to accompany my 1990's model KR-V8540 -Kenwood receiver(at the time it was a state-of-the-art receiver).  The receiver does not have digital capability however it has such things as DSP logic/Prologic/Dolby Surround.  After moving into the home and using the system for a while (assuming all is fine) a neice of mine managed to turn the volumn on high and then turn the stereo where there was no radio station on so the output was very loud static (blew the covers off the speakers).  I was affraid the speakers had blown however was sure because most music sounded fine.  Last night I connected an ipod shuffle through the auxillary jack of my receiver using the ipod connector monster cable.  The sound was terribly distorted, mostly base with crackling sounds.  Needless to say the system as is now is usless for listening to the ipod.  Do you have any suggestions as what the problem might be.  I don't know if there is a compatability issue given the model(age) of my reciever and the digital ipod or if my speakers are shot or otherwise something altogether different.  Thank you for your expertise.

Speaker specs
Features:

Sensitivity (2.83V @ 1m): 89dB
Low-Frequency Driver: 8" Titanium-laminate cone with rubber surround
High-Frequency Driver: 1" Titanium-laminate dome with swivel mount
Maximum Recommended Amplifier Power: 100 Watts
Frequency Response (–10dB): 32Hz – 20kHz
Crossover Frequency: 2.4kHz
Plate Size (Diameter): 10-7/8" (275mm)
Mounting Cutout Size (Diameter): 9-1/2" (240mm)
Mounting Depth: 4-1/4" (108mm)  

Answer
Hi Cory,

 Thanks for the specs but I actually do allot of work with JBL and I'm a little worried that I already recite them in my sleep.

I'm about to ramble on to make sure all bases are covered, but if you skip to the second to last paragraph you;ll get to the heart of my answer - you should first try backing off the volume on the iPod and raising the volume knob on the receiver.

  Are you very certain you installed the 8C and not something with "CT" in the name?  More to the point - if you installed these speakers with a transformer then any concern for speakers goes out the window - it's highly improbably you blew a speaker that has a fixed power tapping off the transmission line.
 Assuming everything's done correctly, it would also be hard to imagine that your Kenwood could blow the speakers even if they were wired in directly (if you have no idea what I'm talking about in the paragraph above, and you did this work yourself, then we should both assume that your speakers are wired in directly). I seem to remember that Kenwood being 85W - scanning online I see it quoted as 75W - either way your SS8C's are essentially rated to handle 100W RMS - plenty of headroom for even white noise.
  Also, digital audio/DSP/Surround sound have nothing to do with this.  In consumer audio, these are tossed about pretty loosely to often intentionally confuse people - PT Barnum learned long ago that bewilderment made money easy to take - your Kenwood is fine for this use as the Ipod is only giving it analog audio.

  Here is my concern:
Problem 1 - multiple speakers.  
This is still a consumer receiver - no one has four left and four right speakers operating simultaneously in their living room.   If you bought more than one ceiling speaker per channel, and wired them off the same channel, then your amp is driving a load that is WAY less than what it was designed for.  You can sometimes get away with that if you keep levels low down speakers aren't demanding a high current draw.  BUT if someone were to come along and really drive them to their limit - it's very likely that the amp overheated or overloaded its limited buffer circuitry and the amp channels are bad.   If this is the case, you should search around to see if there is a fault reset for the amp cards (not likely on this model), or if they will reset to neutral after a deep power cycle (unplug the receiver, wait two minute, plug back in.   Unfortunately, if neither applies/works, you're going to need to consider a new unit.  There's just no way to get the genie back in the bottle.

If that sounds a little complex, fatalistic, or off the mark for you - I have some good news.  It may just be a problem of gain structure - for some reason the analog signal from your ipod is too strong when it hits the amp circuitry and so it gets clipped - distorted like a Hendrix's guitar.  This happens ALL THE TIME, especially when knobs get fiddled with unsupervised.   If your "AUX INPUT" have it's own volume or sensitivity adjustment (check your manual - you may be surprised) make sure its set to something intermediate - usually "0" just to be confusing.  Then, lower the volume of your ipod and raise the volume of the receiver - you may reach a point where the distortion returns to normal.  You should definitely spend some time on this if everything else (i.e. radio) sounds just fine.

Lastly, your problem may be your niece.  If hardware restraints are not permitted by the original manufacturers, I recommend an immediate replacement or upgrade.

Best of luck, and feel free to get back to me if you have more questions.