I too would have picked Terry for the squad but if Roy wanted to pick both Rio and Terry but found out that one or both did not want to play with the other then, as the guilty party, Terry should have missed out.
As for the armband, I never thought that Terry should have been given it in the first place. While he was and to some extent still a good leader, his poor reputation preceeded him and has proven largely correct and once he was stripped of it the first time, rightly or wrongly, he should never have gotten it back. The hot-potatoing of the captaincy under Capello was ridiculous. What kind of message would it send for him to get it back again?
With Rio out, Parker seemingly injured, Rooney suspended and Terry black-balled, there really is only really one other option and that is Gerrard.