With the Zoom H2 you'll be locked into a stereo recording with no ability to multitrack (IIRC). If you can afford it go for the Zoom H4N as it supports 4 channel multi-track recording.

I could be wrong though. Feel free to correct me

No need to whisper. That's what they're for, man...

Man, if I noticed a mic hanging directly above me; I'd just whisper "penispenispenispenis" the entire time.

I vote for a 4track recorder (or four ins to your choice of DAW).
Two from a sub mix that either yourself (a lot of chip dudes have some kind of mixer for themselves, it will sound how you intended it to sound if you get this mix) or a mix from the sound guy's desk and then a stereo pair for crowd mics.

Mix to taste.

This method (I am 95% sure) was the method used for Derris-Kharlan's live album and that sounds pretty fucking ace.

If the board can do sub-mixes (such as monitor mixes, etc), consider that.  Odds are, what's coming through the mains isn't always going to be the best mix for a recording, since the live mix is going to be pretty specific to the room.  If you use a sub-mix, you can mix it just the way you want it on the CD.  Or mp3.  Or record.  Or cassette.  Whatever floats your boat.

or just dub in some world cup cheers, for that 'stadium' effect

I would say line out from the board / mixer, as well an an omni-directional mic. Through experience, the micshould be placed near the rear of the audience -- hanging from the ceiling, if possible (wrapping the cable around a beam several times). It's all about post production in these instances, mixing the crowd noise in and out as desired.

This is a definite do.  I work for a live productions crew and our lead audio engineer always sets up a couple of ambient mics around the room to grab audience noise.  The mic is always on but it's kept silent in the mixer and is only added in sparingly when the situation on stage is fitting.  It's pretty great to hear around the beginning or end of a track, maybe if banter is particularly hitting with the crowd.  Be creative!  Best case scenario though would be having it as a separate track that you can mess about with later - accidentally adding it when you don't want it sucks.

i would do both, use the recorder near the back (far far away from the speakers) and just record the board mix with a laptop.

try to get a sound in at the beginning that you can use to sync the two recordings up (most likely: gameboy start up noise).

that's what I would do.

My friends and I have a lil show coming up with 7 or 8 artists and I was hoping to record some of the sets. I will probably be recording in smallish 40 - 100 capacity clubs and I would very much like a little advice on hardware and best practices.

I would really like to get crowd noise on the recordings and have the recordings be as high quality as possible.

I have been thinking about the Zoom H2 which I think Nullsleep used for his last tour.

http://www.zoom.co.jp/english/products/h2/

Any pros and cons? Any alternatives?

Where is the optimum location to have the recorder positioned? Any advice for recording well?

Would it also be a good idea to get a line out from the main mixer and then mix the two sources together?