Motorola Droid :: Droid Is Stuck In Boot Loop

First time post here, hoping for some advice. This is the situation: as of late, my Droid would occasionally reboot itself. Didn't think much of it (new phone, new system. Wasn't expecting perfection). However, tonight (while updating an app from the market) the phone froze, rebooted and got stuck in 'The Red Eye of Death' loop. I tried pulling out the battery and sd card several times. No luck. After googling and reading various postings (this forum and others), I started to notice that a lot of the issues revolved around 'rooting'. I have a sense of what rooting is however I have no real interest in it (warranty, wait for update, etc.). But apparently, I have a rooting problem. I'm able to get to the recovery mode (power up while pressing 'X', etc.). The choices I get are: 1.reboot system now 2.apply sdcard:update.zip 3. wipe data/factory reset 4. wipe cache partition. But under all that is 'E:cant open /cache/recovery/command droid'. When I run 'sdcard update' option, I get 'No such file or directory. Verification failed. Installation aborted.' My first question is: what is it trying to update to? I was already at 2.0.1. Has the phone somehow reverted back to 2.0 and is trying to get back to 2.0.1? And if so, why is the update file missing? I think I have four options. The first is to return the phone and wrestle for a new one (and not a refurbished one). Although, this may be the easiest route, there's a lot of work I've put into my phone already; files, settings and apps that I don't want to lose. Plus I just don't want to deal with a Verizon rep if I don't have to.

Second option is to try 'wipe data/factory reset'. Again, don't want to start from scratch. However, I find this option more desirable than the first because I get to keep my 'new' phone, which I've already grown attached to. My only concern with this though, is that I read a post where someone tried this option but his phone then became deactivated and he couldn't re-activate using his original numbers. So that's a potential risk. Third choice putting the sd card into my laptop, download and install the 10mb 'update.zip' file, and recover from there Four: the Droid 2.0.1 sbf file / RSDLite solution posted elsewhere on this forum. So my ending questions are: In regards to options 3, if I took this route would I be in essence rooting the phone, or is rooting more than just manually updating your phone? And did the 'Droid sbf file' come about because the 'update.zip' file doesn't always work? Just need some advice to help me make my decision. Just want my good ole Droid back.