Pags - could you answer one more question please ?
If I install LXDE 2009.4 - which I have downloaded... and update to the current Gnome desktop, will the onboard graphics still be a problem - in other words is it purely a LiveCD problem or a Gnome/KDE issue ?
I believe you'll be fine (but, as I said, I haven't changed the DE on this PC, yet). The LXDE uses a newer kernel than the 2009.2 releases, which started incorporating some of the fixes to the Intel code (there were problems with all distros, for a while, back when this happened...it just so happened that the problem kernel became the basis of the 2009.2 iso
I would suggest getting a working install and fully updating it. Confirm it's still working. Remaster (or otherwise backup), and then update to the latest available kernel. Confirm it is still working. Remaster again (if you want a stable point to fall back to). Then install the new DE (i.e., Gnome, or whatever else you care to try).
This is all conjecture on my part, at the moment. Hopefully it gives you a reasonable road map to get what you want. Bear in mind that in order to go forward, you'll still need to re-install the 2010 release (at a minimum, when it goes final). It may not hurt to try the beta liveCD on the PC now. I'm not sure when I'll get a chance to do so.
You mentioned that you have an AGP slot available. That may provide a good solution. That is not an option for me (Dell Dimension 2400 ... no video slots...only PCI), and I don't really want to spend any more money on this machine. I'd rather buy an inexpensive new one, if it comes down to it.