Wow, I'm glad I could come up with an idea that you liked!

Yoda doesn't have to already be on Dagobah; depending on how the events play out across your three prequels, he certainly wouldn't be on Dagobah during the Clone Wars (but he'd still remain unseen). You could hear in passing about where Yoda is - he led a glorious battle on so-and-so planet, etc.

I'm not sure the Jedi have to be demonized in the prequels, though; that's one of the things I didn't like in the "official" prequels (although the prequels handled it very awkwardly). In fact, making the Jedi "less-than-good" weakens the effect of the Empire, which is supposed to be truly evil. I think the Jedi should remain paragons of virtue, even as they're being hunted down and destroyed one by one. It certainly makes the Empire more threatening, that even the Jedi at the height of their strength couldn't stop the Empire from coming about. In fact, the only reason they were nearly destroyed is because of Vader; if there hadn't been an ex-Jedi on the side of the rising Empire, the Jedi might have been successful in stopping the Empire from coming into existence.