Make sure that you have turned-off all of the DSP functions in itunes:
I had an issue like this--same kind of distortion--that turned out to be very strange and perpexing once I explored it. I'm still not sure what the root of the problem was, but it must have had something to do with some corruption in some arcane application support file in my user account (OSX, Panther) that interacted with iTunes. (It was not related to any signal processing functions within iTunes.) It did not have anything to do with Airport Express and Airtunes, so I would suggest you go ahead and plug some headphones into your Mac and listen for the same distortion.
I don't know that the chances you are having the same problem are very good, but if you hear the distortion coming straight out of the Mac, without Airport in the chain, you could try this next (if you're on OSX).
Locate an offending audio file in the Finder. Set the Finder window to column view. Then when you select the audio file, you'll get a little Preview pane that will let you play the file right from the Finder. Is the distortion still there?
Here's another diagnostic step. Set up a new user account, move an audio file that is giving you trouble into the iTunes library of the new account, and see if the distortion is still there.
If the answer is yes to these diagnostic questions, then you may be experiencing the same problem that I did, and we can talk some more. If the answer is no, then I wish you good luck on your search. You should be able to get good sound without any such obvious signal degradation through an Airtunes setup.
Don't know if the original poster is still trying to solve his problem, but I should make a correction to my message.
I said, "If the answer is yes to these diagnostic questions, then you may be experiencing the same problem that I did". I should have said, "If the answer is _no_..." (i.e., the distortion disappears when you try those two things).
Sorry about that.