I am looking for the cheapest way to get into developing for Morphos. I have tons of spare equipment so all I am looking for is the motherboard and processor. My questions are:

1) Would it be bad to get a Peg I if I am interested in coding at an application level (don't want to do driver work).

2) Anyone know where I can get a cheap Peg I board and G3 processor?

3) If the answer to 1 is don't get a Peg I where can I get a cheap Peg II/ G3 board?

thanks.

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Not at all, if you can live with the "minor" problems (TV tuner cards not working with AGP gfx cards, small sound distortion when moving big windows...) and slower (than Peg2) memory bus & processor

Oh, memory can be problematic aswell, but it will be no problem after you've found compatible memory...

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Best would be if you could find someone willing to upgrade his Pegasos 1 to Pegasos 2 "georraphically" close to you...
Also some resellers might have Pegasos 1's, and most (if not all) sell bare motherboards.

3 - I would recommend you to go for a Pegasos II instead. A dealer I
would reckomend is: GGS Data. They probably have boards in stock
too for fast deliveries. Drop a mail to gunne@ggsdata.se and ask
about prices, availability, shipping and so on. They may have some
Pegasos 1 boards too!