After researching this issue for 3 days, I concluded that it all comes down to the "new" NOISE CANCELLATION system being implemented on the iPhone 5. The bad voice call quality, the dizziness, the muffled sound, the fading in and out, back ground noise, the useless earphone, etc are all caused by the same problem.
There are several major differences between iPhone 4 and 5 regarding noise cancelling:
1. iPhone 5 has 3 microphones. One or all may be used for noise cancelling. The iPhone 4 has only two microphones. Complexity breeds problems.
2. iPhone 5 has a back-side microphone that may be used for noise cancelling that may be not best located. What if this microphone is blocked or partially blocked or affected by wind noise?
3. the new noise cancellation hardware & software was done by Apple, previously done by Audience, which did works for Google Nexus and Samsumg GS. New hardware & software are likely leading to more bugs.
4. The new earphone that has its own "noise cancelling" may not be thoroughly tested with the iPhone 5. We are not even sure if the microphones on the iPhone are turned off while earphone is plugged in.
5. It seems iPhone 5's noise cancellation system did not make use of promixity sensor to sense whether the person is close the phone or not and adjust its "noise cancelling" accordingly.
In my previous life, I used to work as a telecom engineer and testing all the phone's functions is a huge task that I can see that with Apple's secrecy, it will make it very hard for them to test out everything with their new noise cancelling system and on a brand new phone. You have to plot out every scenario that the user MAY use the phone and accomodate them. Had Apple stuck with Audience system and just add the third microphone's function, it may turn out better.
Most users are not bothered by this issue because many of them are using the phone in a "correct" way that works out fine with the noise cancelling system on iPhone 5 - close to the face, no speaker phone, no earphone and not moving around too much. Many users are not sensitive to the "vertigo" effect due to "noise cancelling" sound waves and they see no problem. Many users do not talk long enough to feel the problem - they mainly use it as a mini computer.
I'm sure Apple will fix it in the next iOS release, but I can see it may introduce more bugs - you simply can't test for everything.