I think it was Ozpeter who determined that using the menu for level changes will not prevent input clipping or distortion because the signal is already past the A-D stage.
Correct. When using external mini-mics, I would set the H4 at low sensitivity and menu at 100 for anything loud (so the meters will tell you if you are clipping) and use a ST-9100 to increase or decrease levels from there. Then there's no danger of clipping, but as we've said the machine has other problems. There's nothing you can do to eliminate this problem when using the internals (the H2 is the same, but apparently not the H4n).
Sorry, I thought you were saying previously that you used the H4 menu system to adjust record levels for external mics which, as you point out here, is not the way to use the H4. In fact, the mic>preamp>line-in set-up makes sense even with much better machines (particularly for loud situations).
When using the internals, I just moved the machine if levels were too hot even for low sensitivity, and I never had distortion problems, but then my usage was not for loud bands.
The H4 usually gets a bad rap, probably deservedly so for the most part. The OP asked for experiences good and bad and I had some good ones.
Even the spectrum graphs posted above are a little surprising to me. The H4 recording looks worse than it sounds (at least to these tired old ears). And the second recording sounds better than it looks.