You have to turn down the volume apparently. It's a wide-spread problem it seems so probably not worth trying to get a replacement. If I bring the volume down a couple notches it sounds OK. In the car though when using a GPS program it's kind of quiet and basically you have to decide between barely hearing it vs distorted kind of hearing it. Kind of sucks.
I actually like how they boosted the volume on the 3GS. Makes it much easier for us older folks to hear the darn thing. LOL
I kind of agree with Apple on this one. It's much better for folks to turn the volume down then to hear complaints about how the iPhone isn't loud enough.