Matt
OK So Audio Driver Bit Depth is set to 24 that's what I should set record bit depth to?

Makes sense to me. The driver delivers 24bits so record at 24bits.

Matt
 
When you say no A/D converter can record above 24 bits does this apply if I am only working with digital and no analog?

If there is no analog there is no A/D converter but I have to wonder what is being used for I/O.

Audio within Sonar can be any bit depth and its rendered that way. From 16 bits to 64 bits.  Audio coming in to Sonar via an A/D converter is converted to a maximum of 24 bits no matter what the file setting is. 
 
You should not have the problem you describe by just going into the red, slightly. (Going into the red is not clipping. It has to go above zero to clip) Sonar as rule is working at 32 bits floating point or 64 bits floating point and should not clip while mixing unless you send audio out to the main outs that is too loud. Sonar wont clip internally. Something else is causing the problem and I suspect its overloading the outs of your audio device. It will clip.

In my original example I was re-recording a pre-recorded flute sample from another computer.  So the audio went out the computer's RME Hammerfall card via ADAT into an 02R96 then via ADAT into the 2408 where I was recording it.  So digital the entire trip?  From there it goes back out the 2408 via ADAT back into the 02R96 then out via SPDIF into the Dangerous Music DAC-ST where it finally gets converted to analog then into the Dangerous Music MonitorST and into the monitors.

Even with all that SONAR is communicating with the 2408 via a 24bit driver.

I looked at the waveform in the example. It's not clipped; it's full of dropouts. I think the OP needs to raise his audio buffer, and/or get a good audio interface if this is from an onboard soundcard.
 
EDIT: Missed the interface details in OP's last post. Does sound and look like a clock sync issue as mentioned below.
 

Sounds like also the signal is taking a very roundabout route to get from you source to the DAW. Are all your digital clocks setup so they are locked correctly. If they are not at any point you can get some strange sounds too.

Jeff Evans
Sounds like also the signal is taking a very roundabout route to get from you source to the DAW. Are all your digital clocks setup so they are locked correctly. If they are not at any point you can get some strange sounds too.

I was wondering about this myself, Jeff. I don't know what is the cause but I sure would simplify the routing. 

I have an Apogee Big Ben providing clock to every digital device, it's rock solid.
 
The routing is not that complex I just do everything with an external mixer, not within Sonar like a lot of you.
 
I have 6 external computers that output 48 digital outs (8 each) into a pair of 02R96s.
I have 16 analog synths that get summed down to 8 outputs via a pair of Neve 5059s and then into the 02R96s.
I have 7 channels of ADAT audio (56 outputs) going out of the 2408s into the 02R96s.
 
Make sense so far?  112 channels meet and get mixed in external mixer.
 
Going back IN to Sonar via the 2408s I just have 1 channel of ADAT (8 inputs) so I can record in Sonar plus the stereo digital SPDIF signal which carries the final stereo mix which I record/bounce in Sonar.
 
Despite not being able to communicate my issue/problem, it is now "fixed" and I am very happy.
 

Just an FYI - I recently did a recording where there was one over, it was a clipped sample and it gave this horrible loud click. I found out it was possible to zoom waaaaaaaaay in, select just the clipped sample, cut, and close up the two halves--the click went away.
 
Also note that it IS possible to normalize a waveform in another program, bring it in to Sonar, have it touch 0, and get a nasty click. This is one of the reasons why I always like to leave some headroom.