I think navigation option #2 continues to have the same problem where your pop-up menu list is going to keep getting bigger and bigger.

Why not use normal links and then either have a sub-category page (where the size doesn't matter as much as a pop-up would), or store your entries in a single list but have paging so that single pages never get too big.

And yeah, textured backgrounds are very 90's. I had one on this site for a while. Now you're best to do either solid colors, or some big subtle graduation.