Distorted sound in Macbook

I am using a 13" White mid-2007 Macbook.
Sometime ago, I noticed that the sound from the built-in speakers is not clear.

1. The sound from built-in speakers became lower in volume and a bit distorted - as if someone had messed with Equalizer settings. It gets worse as I increase the volume level. (Distorted/Crackling is the best way I can describe it - or maybe as a low quality sound).
2. Even the startup boot chime sound is not ok.
3. The sound from the headphones is perfectly ok.
4. This Macbook has Windows also installed and I checked that sound in Windows is also perfectly ok. I am assuming that it means that the problem is not hardware related one.

Any idea what could be wrong and how I can fix it?
Thanks!

This is a tough one to trouble shoot. The startup chime a Mac makes is actually the POST ok sound and is generated before any other drivers are loaded. Like you say, hardware is probably ok if the sound is normal in Windows. What makes it even more strange is that sound from the headphones is ok. The only thing I can suggest is remove all startup programs and devices that you may have attached to the MacBook to see if that helps. Also, how long has this been going on?

Thanks for your suggestions.
This has been going on for about 6 months but I never really bothered to troubleshoot. I disconnected everything from the Mac, removed everything from System Preferences > Accounts > Login Items and then rebooted. The problem still persists.

You're going to have to be "Columbo" on this one. In other words, good detective work. You may have a program or plug in, extension, etc, that's causing the sound distortion and lowering from the speakers. Whatever it is, it's not impacting on the headphone output. And it's obviously something running in OS X since Windows is OK.

I will find a spare external hard drive and install OS X on it and check if the issue persists. Will post my results. Thanks again for your advice.

Fresh installation of OS X on an external drive also has the same problem. So it is nothing in the OS but something in lower layers? I reset SystemAudioVolume in NVRAM but that too did not help either. Perhaps resetting SMC will help (?)

It almost has to be something OS X related if you say that the sound is normal when you run Windows. If it wasn't for that, I would say you have damaged speakers. I've run into more than one older MacBook and MacBook Pro which had sound distortion that increased as the volume was increased. And each one was repaired by replacing the internal speakers. Your problem is unusual and difficult to trouble shoot. You can try resetting the SMC as it certainly won't hurt.