I had an original iPhone from the US, before the speaker volume was increased, and this distorted only slightly on music, and never on SMS alerts and ringtones.
But, my new 1.1.2 UK iPhone distorts quite a bit on music now (although if you go to EQ and turn on Bass Reducer, this practically eliminates it for the iPod application), and also - more annoyingly - on certain ringtones (Marimba/Strum spring to mind), and the Tri-Tone SMS alert, even when they're at medium volume. It's only slight distortion, but there nonetheless.
This is my 2nd UK iPhone now, so I guess they're all like that.