I'm not sure if your doc could know from an x-ray alone that you would never run again, so take it as a caution, not a prognosis. If you follow Damien's advice and move to biking. you should preserve most of the aerobic capacity you've built over the years, and the joint may improve. That may not be the only problem you face, but staying active with non-impact aerobics delivers the circulation you need for your best shot at healing. Rest alone sounds less damaging, but in actual practice it does not help as much.
Look into an anti-inflammatory diet as a way to reduce pain and swelling long-term. If you have been prescribed meds for this, remember that they are probably for increasing your pain-tolerance and reducing symptoms short-term, not for fixing your knee. Think of long-term solutions.
I'm most concerned about your treadmill, and how it may be set up. Many people adjust them for inclines to get more resistance, but this imposes an unnatural angle that can force unhealthy adaptations. It's hard to get the same effect as running outdoors without wind resistance, and many people suffer during the transition to the mill. I'm hoping you fare better with the bike. Good luck!
Here's an interesting article on knee pain, with helpful comments about cartilage health, and the importance of muscle balance.. http://www.drpribut.com/sports/spknees.html