The zoom H2.
It's good for capturing ideas, but not to produce anything of good quality.
We need to just put the cash down for studio time.
It's no substitute for a quality multitrack recording, but if you utilize some fundamentals of recording engineering, you'll probably get a better result. Forgive me for a little bit of a long post, but I'll boil it down to 3 things:
1. Gain staging
2. Use your ears
3. Take your time
Overly generalized, but they all kind of overlap in places as well. Let me specify:
1. Gain staging - Adjust your input gain so you do not get any signal clipping. Signal clipping on the input can never be fixed in a satisfactory way later. Familiarize yourself with the H2's user manual and learn how to use the controls. They may have different labels for specific functions, but they should explain what they DO, so you'll be able to figure out what controls the volume level of the mic signal that's being recorded.
2. Use your ears - If you turn the input gain down to the point where you're not getting any clipping (with a decent margin for safety, songs have dynamic volumes) and it sounds like crap...change something. Try moving it farther away from the source. Move it around the room, find a spot where it sounds best, the input gain level might need to be higher or lower in different areas, it might sound better with the input gain lower and the instruments louder (or vice versa). Don't forget you're in 3 dimensional space, move it up and down as well. It might sound better closer to the floor, at waist height or high up, aiming down. Experiment, but always listen back to the result and adjust accordingly.
If you don't have a lot of gain controls for individual tracks, then most of your gain staging is in the room. So if you can't mix individual tracks, mix the environment. You can turn the volume of individual amplified instruments up and down, adjust EQ, but you can also MOVE the amps. Also, since you can't adjust the volume of the drums (presumably), that's your fixed point, change everything in relation to the drums. If you don't like the way the drums sound you can physically change them too. Tape a quarter or a piece of cloth to the beater head of the kick drum to change the attack, fill the shell with a pillow or blanket, dampen the snare or tom heads with gaffer's tape to change the resonance. You can also adjust the tuning of the drums, if they sound too "thwacky" or "boingy" (most overlooked issue with bands recording, tuning drums). Too much cymbals? Again, move the recorder around (height especially), it's all a big balancing act. For everything you change, you might have to adjust something else.
On the subject of use your ears...make sure they can be trusted. Use a decent pair of over ear headphones to check your sounds or pump them through a PA. Use a reference, plug in your ipod or something and play a song you know, compare how it sounds (adjust the volume of the reference song to match the H2 output, not the other way around, your music isn't mastered). Record a bit, listen back, adjust and repeat until you're happy with the sound.
3. Take your time - Don't rush through the process, know that it's going to take time and have realistic expectations. Rushing will not improve anything. If you have to, do this for a whole practice, leave everything where it is (you can always mark settings, lay down painter's tape to mark positions), then come back and focus on your performance another time. They're separate parts of the recording process. If you don't give them each their due time and attention, one or both will suffer. Using your ears a lot wears them out. Know when to walk away, because if you do this setup portion too long and THEN try to record, you're more likely to just say "good enough" and rush through things. Your performance is probably going to be a lot better if you're not worrying about the engineering portion of the project. Get it done, then let it go and move on to the next point. Then you can listen back from a performance point of view, now that you've got the sound the way you like. You can always make some minor tone adjustments as you go if you like, just don't forget to check the RECORDED result, don't trust what you're hearing in the room will translate to the recording.
The best resource you have to make a good recording is time, critical thought and patience.