Unfortunately, the fact you're still on Donut (Android 1.6) means that basic help is going to be impossible. The reason being that, if I recall correctly, to do the upgrade from Donut to a later version will require you to manually flash both a new baseband and a new recovery before you can even install a Froyo (Android 2.2.2) ROM. Since you have to flash a new baseband and new recovery anyway, you might as well skip the baby steps and go straight to a custom ROM.
I know that's not the answer you were expecting and I apologize, but it's the simple truth of the matter. In answer to your questions...
1. The recovery image is loaded into the Streak the same way the baseband files are, through the Streak's fastboot mode. While you should look in the Dell Streak wiki on XDA for instructions on how to manually flash the baseband and recovery, I have a tool that can automate the process so all you really have to worry about is installing the drivers, which should be possible using Dell's sync software.
What is stored on the MicroSD card are the actual ROM files. Dell provides them in a .pkg format compatible with the stock recovery. Custom ROMs are provided as .zip files which will not work in a stock recovery but will work in a custom one.
2. Dell ROM packages are region specific. The baseband files and the recovery are all region specific. These regions must match to be able to flash a stock ROM. In your case, going from Donut to Froyo is such a huge jump that the only way I recall to accomplish it is to manually flash the baseband files and stock recovery. It's not as dramatic going from Froyo to Gingerbread (Android 2.3.3), but manually flashing the baseband files and recovery is why I recommended in my opening paragraph to skip the baby steps. Since you're going to have to flash both baseband and recovery anyway you might as well go with a custom ROM rather than stock.
3. This question was partly answered in 2 above. It is possible to install a baseband from a different region than the recovery. As long as the region of the recovery matches the region of the ROM the ROM will install. However, when you boot the device, the OS kernel checks the firmware version of the baseband files to see if it matches what the kernel expects. If the versions do not match, your Home, Menu, and Back buttons will all flash every few seconds. This is an indicator of a baseband mismatch.
To resolve a baseband mismatch you would need to flash the correct baseband. The custom Gingerbread ROM I offer, its predecessor, and all the Cyanogenmod 7-based ROMs all have the baseband check disabled in the kernel, allowing any baseband to be flashed. For an easy example, take a look at my ROM or its predecessor and their "Flash Me Before Installing" packs. That pack will install the 366 baseband, while the ROM itself is 407. Ordinarily there would be an issue of flashing lights but the check was disabled in the kernel, so the flashing lights will not trigger.
Q: Can someone suggest a link I can follow that will walk me through the root process for this phone?
A: Simple answer is no. Do your homework. No spoonfeeding here. Check the stickies and the search engine. You'll find it soon enough.
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