This is actually normal behavior for Sound Manager 3.0. The loss of resolution is due to scaling of the actual sound samples. For 8-bit samples (and especially quiet sounds), there isn't much resolution to begin with (256 levels). The alert volumes slider scales each of these samples when sending them to the output channel, causing the distortion noted.
In the future, the Sound Manager might apply some sort of non-linear scaling for 8-bit sounds to minimize this problem.
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