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I agree that it is almost certainly to do with your files being encoded at a level that's too loud. I use my iPAQ regularly for music and it's bass/treble reproduction through headphones is top-notch.
Take note as well that the "iPAQ Audio" settings only affect the bass and treble of the headphone output. There's not a lot that can be done to stop PDA speakers from being so 'tinny'.
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