Yep, that's what I get on my H2. If it is clipped at the start, nothing you do to it internally 'un-clips' it.

I have to use a volume control headphone adapter to reduce input levels BEFORE the Zoom.

One last question, Stephen....

Can you adjust the gain (or recording level) for the line ins and mike ins independently? If you were making something that was a combination of board output and some live mikes (only way to get a good balance for a live band, especially), you would need this, I would imagine.