Don't use ROM Manager - seriously!!
Edit: Right, I posted that straight away, just so that you saw it. Now will add the detail.
ROM Manager has been known to soft-brick HTC Desires. We actually have a sticky thread in this forum telling people not to use it. Just uninstall it.
How to change ROM is described in the rooting faq (linked from the All Things Root Guide sticky post). But I'll describe the basic steps below.
First thing to know is that the ROM lives in a different partition from your apps and data. Flashing a new ROM will completely replace your current one. CyanogenMod is actually smaller than your current ROM, but you won't gain extra space because it will just mean that there is more unused space in the /system partition, whereas the /data partition (where data and user apps live) is the same size. If you want more space for apps read the root memory faq, which describes your options.
Before flashing any ROM, or modification to a ROM, you should go into recovery and take a backup. This is what people call a nandroid backup - it backs up the entire ROM and all of your apps and data, and if you restore this (also from recovery) it puts things back the way they were when you took the backup. So that is how you revert to your present state.
The basic steps to flashing a ROM are:
* Read the first few posts of the ROM's thread on XDA. Make sure you meet any requirements, i.e. if it want a particular hboot (you are currently using "stock") or partitions on your SD card do any of that stuff before flashing (and if at all unsure, ask how to do this first - the root memory faq is the starting point for both of these things).
* Download the ROM .zip file and put it on your SD card
* Back up your apps and data. Titanium Backup is good. For messages you can use the paid version of Titanium, or another backup app (I use SMS Backup+ to back mine up to my gmail account). Make sure contacts are backed up (export to sd card) unless you sync them with Google.
* Go into recovery. When in recovery, take a backup (as I described earlier). You need this in case anything goes wrong, or you don't like the new ROM.
* After doing that, wipe the phone (factory reset)
* Select "install zip from sd card", find the ROM zip and install it.
* Reboot. First boot may be slow.
* Install your backup apps (Titanium etc) and restore your apps and data.
Sounds a lot, but when you've done it a few times it becomes routine
Now as for recovery, when you go into this (go into hboot, select recovery) what it is showing? Still 4Ext? If so, fine. If it's giving a message about safe mode try just rebooting recovery (in one of the menus). Do not format system - that will wipe your ROM! Just try this and see whether we can get rid of that mesage.
What ROM Manager does is install a copy of ClockworkMod recovery, but in a "fake" way, i.e. not written to the recovery partition on the phone. This is less stable and reliable than a proper recovery install, which is why we say not to use it. It's also why when you use ROM Manager it looks like you have one recovery but when you go via hboot you have another. I think ROM Manager will have placed its CWM image in 2 places on your phone - I did this once to diagnose a problem someone was happening, but can't remember where they both where. One was somewhere in the clockworkmod folder, just don't remember the other. Once you've got rid of ROM Manager you shouldn't need to worry about this though.