"Does increasing the FSB to match ram and lowering the multiplier (to a total frequency of less than or equal to stock) increase heat?"
No. The only difference is better performance due to bandwidth even though the cpu is at the same speed. The cpu gets no hotter. The northbridge may get a shade hotter but that's not a problem. I guess the cpu might get a shade hotter because it may run at higher utilitization because it is not bandwidth constrained. But do it anyway. Low temps due to a constrained cpu are not a good thing.
"My Soyo monitor in Bios says that my "on die" temperature is around 65-69 C all the time."
On-die will reports a temp of 10c-15c hotter than what most of us have which is a sensor beneath the cpu socket. You are still a little high but nothing to worry about. Could be your sink is lame or your paste is uneven due to the sink being bumped.
"Maybe the heat is why randomly my computer will report my 2100+ running at 887 Mhz in WinXP Control Panel."
no idea what that is from, but heat will only cause lock ups on your machine, not slowdowns.
If you have mutlipler and fsb control in bios, you want to always run at the max fsb that is in synch with your memory. For a cpu at 1.73ghz and a mobo like yours this will be somewhere around 8.5x200 or 8x215. Or you may have to settle for 10x175.
"I'm just not sure what temperature I should be looking at"
Speedfan and mbm5 and all other temperature reporting software needs to know what mobo sensor to report to you. For your board you have two choices for the cpu:
LM90 for on-die cpu diode
SIS950/ITE705F 2 for cpu socket sensor
Try mbm5 from livewire and try each setting.