I’ve recently rooted and installed cyanogenMod 7. It’s given my Desire a stay of execution from the upgrade fairy. It’s not as scary as it sounds and once you’ve done it once you’ll be flashing ROMs left, right and centre.
Have a look here.
http://wiki.cyanogenmod.com/index.php?title=HTC_Desire_%28GSM%29
A custom ROM like cyanogen is basically a different flavour of Android the latest being a gingerbread flavour.
You will need to be rooted to install a custom ROM. You will loose everything on your phone e.g. apps, data. Your SD card card should be OK, MAKE A BACKUP before you commit to a custom ROM. You will void your warranty installing a custom ROM.
Other custom ROMs are available. See here.
http://forum.xda-developers.com/wiki/index.php?title=File:HTC_Desire.png
Cyanogen allows you to move any none copy protected app to sd card.