OK, tried with latest xorg-edgers ppa and updates installed with the 2.6.32-rc7 
kernel (removed the acpi=off kernel option).
There is *some* progress. The system starts and GDM works. (as before) However 
when in the gnome session it freezes (as before). However, I am able to switch 
between tty's.
Turning the acpi=off kernel option on results in something different though. 
The GDM doesn't load and the screen start flickering with the terminal login.

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[i855] [karmic] X freezes with intel 855GM/82945G videocard
https://bugs.launchpad.net/bugs/476817
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