Working Fix right here: How To Definitely Fix Skype Audio Distortion
Since I installed Ubuntu 11.04 the sound played by skype is very distorted. It's so intense that the individual sounds are almost unrecognizable. Something with skypes Pulseaudio integration just seems to be wrong. Other software on my system does work just fine. Only skype has this "problem". It's not only the sounds skype plays but also when I try to talk to someone over skype. They can understand me just fine, but I'm barely able to understand simple words. I remembered that I had this same problem a few years ago with skype. It just took mi some time to remember how I fixed it.
The fix is very simple for this. The problem seems to be that by default the ALSA PCM channel is at max (or almost there). Skype has problems with that. So to change this in Ubuntu 11.04 (and likely other versions/distributions as well) open a Terminal. Type "alsamixer" and press enter. Navigate to the bar (pressing left & right on the keyboard) where PCM is written at the bottom. This bar should go from green (bottom) to red (top). Press the down key a few times till the number just above PCM says something between 90 and 98. Then press the ESC key to exit alsamixer and close the terminal. Now try a skype call again. This should fix the problem, at least it did it for me here.
If you change the sound volume this will go back to 100 again. But don't worry. Skype will still work just fine, not sure why.
On my other systems the default 100 PCM value doesn't seem to create any problem with skype. So this may just be a difference in the hardware drivers for some soundchips. Or something that happens with the way I installed my system. Maybe my PCM value was above 100 but that may only be shown as 100. Whatever the reason its fixed with this ...
UPDATE: After some reboots this problem seems to reappear on my machine. Will dig further :/
UPDATE2: A nice commenter pointed out the solution: http://www.nbuntu.cz.cc/2011/04/distortion-of-sound-in-skype-22.html