I still have this problem with the latest live-usb, from 2012-09-09.
This presumably incorporates any updates that I installed on the
previous live-usb from a couple days ago, so what must've fixed it for
me (i.e., not having to use "nomodeset" any more) was the installation
of the nvidia blob.

I forgot to mention earlier, when booting normally (nomodeset left
unset), the Xubuntu splash screen with the progress indicator comes up
normally. Eventually it stops throbbing, and after a little while the
screen switches to corruption.

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https://bugs.launchpad.net/bugs/1043518

Title:
  live cd is unusable due to video degradation

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