I know the foam you are talking about and, honestly, in my opinion, messing with it isn't worth the pain. Option 1 doesn't work that well, option 2 would be pretty expensive for what you'd end up with and option 3 sounds painful.
Good foam board (without that silly foil!), such as Foamular250 or the blue stuff from Dow, is the way to go. It comes in 4'x8' foot sheets varing thickness (3/4" is the way to go). It'll run less than $20 a sheet--not sure about prices in California. Get the most dense stuff you can find.
Don't throw out the gouged board though... use it to make hills and other terrain pieces for either Warhammer or when you decide to leave the cozy confines of Mordheim for a Empire in Flames, Nemesis Crown or Border Town Burning campaign!