Unless you are running out of room on a small SD card (I've got a 4GB card in my H2), sure, record at the highest mp3 rate you want... but then again, if it's just for you and you aren't running out of room, you might as well record at the highest practical resolution you can get.

I'd still go 24/44 .wav. No encoding artifacts at ALL...

Just remember, lowering the input gain control in the H2 is NOT turning down the input at the A/D converters. You really HAVE to lower the strength of the signal coming into the H2 at the source. I didn't know the aux out on the 3K was variable... (but don't know that much about it!).

But in general, you'll get your best s/n ratio with your outputs turned to maybe 75% or so (it varies with the quality of the gear) and then attenuate your input to the H2. Clean is clean, though... if you can't HEAR any distortion, why worry about it?