Poor iPhone4 (iPod) sound quality

I have an iPhone4 (iOS-4.3.4 | 32GB) that is only 1 month old and I'm finding that the phone's iPod sound quality basically stinks.  It's extremely tin can quality even Vs my iPod.  My cheap earbuds that came with the iPod sound 1000% better than my $400 Monster earbuds. 
I know that unlike the iPod you can download your music on the iPhone at about any data size, but went with the lower to keep the size of the music library smaller.  But, did that kill the sound quality or is there some problem with the iPhone4 and the way it operates, especially on the iPod? 
The same music sounds fine on the iPod, but when played on the iPhone4 the quality is so bad that it hurts my ears.  It's like I'm listening to music between two tin cans attached by sting.
Is there a way around this or is this just simply a problem with the iPhone4? 
It's amazing that my tiny iPodnano can produce better sound than the iPhone4 even with the same headphones or earbuds.
Thanks for any hints...
Mike

I have not tried it with the phone on, it's always been in the airplane mode when I listen to the music.  So with airplane mode the 3G and Wi-Fi are off.  Not sure what BT is. 
Odd thing is that podcasts, tv shows and films all are okay  ... I don't hear any real difference.  It's only with the music.  Know that when I downloaded my music from both the MBP and MBA I used the lower bit rate, but would not think that should make a difference.  Since the iPodnano is loaded at the same bit rate as well.
There are previous posts here in Discussions that seem to show there is a problem with the iPod on the iPhone4.  But, most of those were posted in the last year with nothing recent.  So if it was an iPhone4 firmware issue I thought maybe it had been resolved over time.  Now I'm wondering.
I did just to the latest update this week on the iPhone4, maybe that's what did it?

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