I had a similar effect recently when trying to mix two separately recorded tracks. At first, I thought the levels on the individual tracks needed reducing (via the amplify effect) but when I checked again I found that I had inadvertently turned the volume slider on the track view in Audacity up to maximum. Turning it back down again solved the problem.

I'm not sure that is your problem but it might just be worth checking, though. Also, as Will suggests, check the record levels in your Zoom recorder.

Finally would it not be better to simply record into the Zoom then transfer the wav to your computer for further processing? That's what I do with my Edirol sound recorder and I get pretty good results. I have recorded directly into my computer using a separate mic, but the recordings are rather noisy and, although the noise reduction in Audacity is pretty effective at reducing it, I suspect there is a loss of audio quality in the process.