Apple has released an update to iTunes 7 - iTunes 7.0.1. As the name suggests, it's a relatively minor update but it seems to have fixed the problems I was having with distorted playback. On the first day of using the new version I was having a new problem: iTunes would stop at the end of a track and not move on to the next song. I assume this is a bug in the 'gapless playback' feature but whatever it is, it hasn't happened for a few days.
One other note for iTunes 7 users - my version didn't automatically detect the update. Even when I clicked the 'Update iTunes' link in the help menu it still didn't detect an update. I had to download it manually.