For a first-time Cyanogenmod install, I'd recommend you go to the Cyanogenmod forum, download the 5.0.5.7 ROM and the "Google Addon: EPE54B" zip and place them on your SD card. Doesn't matter where you put them.
OP here has the files:
Cyanogenmod For Droid V5.0.5.7 (04/05/2010) - CyanogenMod Forum
Then back up anything you want to back up in your current ROM.
Then boot into recovery, and use the Partition menu in clockwork recovery to format system, data, and cache.
Then use the clockwork recovery option to "install zip from sd card" (not the update.zip option) to install both the 5.0.5.7 ROM and the google add-on zip. (Koush keeps google apps like marketplace separate from the ROM zip.)
Reboot your phone, sign in, and start configuring/playing. Note - this ROM should automatically download and install all your paid and free apps that you have installed before you did the wipe, assuming you've had the "backup my settings" option checked. While it is doing that your phone will feel a little bogged down, you might want to enable wireless so that the downloads go faster.
Once you have Cyanogen installed that way, for future updates you can use the "Check for updates" option in ROM Manager.
Also, after you've installed 5.0.5.7 you can find themes for it in ROM Manager under the Download ROM option...my favorite is Nextheme under Haxzamatic.
If you want to download a completely themed version of cyanogenmod 5.0.5.7, jrummy has an excellent version available - look in the droid ROM section on the cyanogenmod forums. You can download and install his fully themed ROM the same way you would install the unthemed ROM files above...he also includes stuff that you would probably like to have, like the youtube hacks, etc.
Finally, you'll find overclock kernels available in ROM Manager under Download ROM>Cyanogenmod - from Bekit and P3Droid (I think you have to enable Developer Mode" in ROM Manager to access the kernels...from main screen of ROM Manager - Menu>Developer Mode).