the information out there can be a bit overwhelming, so i will boil it down as much as possible.
1. Download
SoupOrRoot 2.04 to your computer and follow the directions in that thread.
2. Download Titanium Backup and ROM Manager from the android market.
3. Update any apps that need it.
4. Use Titanium Backup to backup your apps (it will save all the info to your SD card)
5. Open ROM Manager on your phone and select "Flash ClockworkMod Recovery"
6. from ROM Manager, select "Backup Current ROM". (name it something like Froyo, Stock, etc. so you will be able to go back to it if needed).
7. reboot, then use ROM manager to select/download a new ROM from the "Download ROM" section. popular ones are CyanogenMod, BuglessBeast, LiquidFrozenYogurt, and UltimateDroid. many others are available in the forums, but those are tried and true.
8. turn your phone off and reboot into recovery (hold physical keyboard "x" + power button), navigate to the "nandroid" section using the D-pad, click "restore" and make sure your backup is there.
9. use DEL to get back to the main recovery menu and select "wipe data/factory reset" and "wipe cache partition", i run the wipes 2-3 times each but it is not absolutely necessary.
10. go back to the recovery home screen and select "install zip from SD card" and select the one you downloaded in ROM manager. your new ROM will begin installing.
11. once it has finished, reboot your phone and make sure everything is working properly.
12. use ROM manager to create another Backup, remember to use a name you will recognize. if you are not going to install a different kernel or theme, skip to step 16.
THE FOLLOWING STEPS ARE ONLY NECESSARY IF YOU WANT TO INSTALL THEMES AND/OR NEW KERNELS.
13. theming your new ROM is the next (optional) step. you will likely need to download the theme from this site, although ROM manager does have a few built in that you can choose from. MAKE SURE THE THEME YOU DOWNLOAD WORKS WITH THE ROM YOU ARE USING!! download the zip file to your SD card, and reboot into recovery and select "install zip from sdcard" just as you did with the ROM.
14. reboot, test, and create another backup with ROM manager. if you are not going to install a new kernel, skip to step 16.
15. installing a new kernel is the last (optional) step. there are a bunch available in ROM manager that you can download to your SD card and even more floating around the web, but keep in mind that all droids are different. some can run ultra low voltage 1.2 gHz kernels and some can't even run standard voltage 800mHz ones, so you will probably have to try a few and see what works for you. THIS IS WHY BACKUPS ARE IMPORTANT! once you have chosen one you would like to try, reboot into recovery, select "install zip from sdcard" and load the kernel.
16. if everything is working well, reload your icons and account settings, create one last backup and enjoy! if not, reboot into recovery, select "nandroid" then "restore", re-load the last working backup, and try again.
hope that helps... i am still technically new at this, but it really is alot easier than it looks!