I'm not sure what is going on here, but since doing two things: reinstalling the 4GB Apple RAM and installing DeepSleep my computer now behaves much better (i7 server)
FYI, I first tried the DeepSleep options of: Regualr sleep (Deep), Widget sleep (quick), at which point I had the strange colours upon waking the display. This was also an intermittent sympton I'd seen over the past few weeks (so can't be directly related to the DepSleep widget itself). Now I have reverted back to the widget defaults: Regular sleep (Quick), Widget Sleep (Deep).
If I use Option+Command+Eject (or the menu option), the system now sleeps absolutely fine. I have slept and woken it a doen tiems in a row with no problem (I have a password to be requested opon waking, and it takes 2-5 seconds or so for the password box to appear).
BUT: The system does not sleep on its own! I have set it to sleep after 2 minutes. The display goes off at 1 minute, but after 3-4 minutes, the mini light is still fully lit, and pressing the keyboard wakes the display and gives me the password box. At least I can now force sleep when necessary.
Any ideas?