Okay, got a chance to upgrade from 8.4 to 8.10 and everything seems to work! 
Very happy :)
Sitting in front of monitors now in the configuration I want!

ii  xserver-xorg-video-ati
1:6.9.0+git20081003.f9826a56-0ubuntu2 X.Org X server -- ATI display
driver wrapper

Settings are the default, except that I changed the Virtual dimensions
to 3200x1600

xorg.conf:

Section "Monitor"
        Identifier      "Configured Monitor"
EndSection

Section "Screen"
        Identifier      "Default Screen"
        Monitor         "Configured Monitor"
        Device          "Configured Video Device"
        SubSection "Display"
                Virtual 3200 1600
        EndSubSection
EndSection

Section "InputDevice"
        Identifier      "Generic Keyboard"
        Driver          "kbd"
        Option          "XkbRules"      "xorg"
        Option          "XkbModel"      "pc105"
        Option          "XkbLayout"     "us"
EndSection

Section "InputDevice"
        Identifier      "Configured Mouse"
        Driver          "mouse"
        Option          "CorePointer"
EndSection

Section "ServerLayout"
        Identifier      "Default Layout"
        Screen          "Default Screen"
EndSection

Section "Device"
        Identifier      "Configured Video Device"
EndSection

# lspci -vvnn 
...
01:00.0 VGA compatible controller [0300]: ATI Technologies Inc RV610 [Radeon HD 
2400 XT] [1002:94c1]
        Subsystem: Dell Device [1028:0d02]
        Control: I/O+ Mem+ BusMaster- SpecCycle- MemWINV- VGASnoop- ParErr- 
Stepping- SERR- FastB2B- DisINTx-
        Status: Cap+ 66MHz- UDF- FastB2B- ParErr- DEVSEL=fast >TAbort- <TAbort- 
<MAbort- >SERR- <PERR- INTx-
        Interrupt: pin A routed to IRQ 16
        Region 0: Memory at d0000000 (64-bit, prefetchable) [size=256M]
        Region 2: Memory at fe9f0000 (64-bit, non-prefetchable) [size=64K]
        Region 4: I/O ports at dc00 [size=256]
        Expansion ROM at fea00000 [disabled] [size=128K]
        Capabilities: [50] Power Management version 3
                Flags: PMEClk- DSI- D1+ D2+ AuxCurrent=0mA 
PME(D0-,D1-,D2-,D3hot-,D3cold-)
                Status: D0 PME-Enable- DSel=0 DScale=0 PME-
        Capabilities: [58] Express (v1) Legacy Endpoint, MSI 00
                DevCap: MaxPayload 128 bytes, PhantFunc 0, Latency L0s <4us, L1 
unlimited
                        ExtTag+ AttnBtn- AttnInd- PwrInd- RBE+ FLReset-
                DevCtl: Report errors: Correctable- Non-Fatal+ Fatal+ 
Unsupported-
                        RlxdOrd+ ExtTag+ PhantFunc- AuxPwr- NoSnoop+
                        MaxPayload 128 bytes, MaxReadReq 128 bytes
                DevSta: CorrErr- UncorrErr- FatalErr- UnsuppReq- AuxPwr- 
TransPend-
                LnkCap: Port #0, Speed 2.5GT/s, Width x16, ASPM L0s L1, Latency 
L0 <64ns, L1 <1us
                        ClockPM- Suprise- LLActRep- BwNot-
                LnkCtl: ASPM Disabled; RCB 64 bytes Disabled- Retrain- CommClk+
                        ExtSynch- ClockPM- AutWidDis- BWInt- AutBWInt-
                LnkSta: Speed 2.5GT/s, Width x16, TrErr- Train- SlotClk+ 
DLActive- BWMgmt- ABWMgmt-
        Capabilities: [a0] Message Signalled Interrupts: Mask- 64bit+ Queue=0/0 
Enable-
                Address: 0000000000000000  Data: 0000
        Capabilities: [100] Vendor Specific Information <?>

d$ xrandr -q
Screen 0: minimum 320 x 200, current 2800 x 1600, maximum 3200 x 1600
DVI-1 connected 1600x1200+0+0 (normal left inverted right x axis y axis) 367mm 
x 275mm
   1600x1200      60.0*+   60.0  
   1680x1050      60.0  
   1600x1024      60.2  
   1400x1050      70.0     60.0  
   1280x1024      75.0     60.0     60.0  
   1440x900       59.9  
   1280x960       60.0  
   1360x768       59.8  
   1152x864       75.0     75.0     75.0     70.0     60.0  
   1024x768       75.1     75.0     70.1     60.0  
   832x624        74.6  
   800x600        72.2     75.0     60.3     56.2  
   640x480        75.0     72.8     75.0     60.0     59.9  
   720x400        70.1  
DVI-0 connected 1200x1600+1600+0 left (normal left inverted right x axis y 
axis) 367mm x 275mm
   1600x1200      60.0*+   60.0  
   1680x1050      60.0  
   1600x1024      60.2  
   1400x1050      70.0     60.0  
   1280x1024      75.0     60.0     60.0  
   1440x900       59.9  
   1280x960       60.0  
   1360x768       59.8  
   1152x864       75.0     75.0     75.0     70.0     60.0  
   1024x768       75.1     75.0     70.1     60.0  
   832x624        74.6  
   800x600        72.2     75.0     60.3     56.2  
   640x480        75.0     72.8     75.0     60.0     59.9  
   720x400        70.1  

(II) Scanning /usr/share/xserver-xorg/pci directory for additional PCI ID's supp
orted by the drivers
(II) Matched radeon from file name radeon.ids
(==) Matched radeon for the autoconfigured driver
(==) Assigned the driver to the xf86ConfigLayout
(II) LoadModule: "radeon"

(II) Loading /usr/lib/xorg/modules/drivers//radeon_drv.so
(II) Module radeon: vendor="X.Org Foundation"
        compiled for 1.5.1, module version = 6.9.0
        Module class: X.Org Video Driver
        ABI class: X.Org Video Driver, version 4.1
(II) RADEON: Driver for ATI Radeon chipsets:

-- 
no image on enabled display (Radeon HD 2400 XT)
https://bugs.launchpad.net/bugs/280391
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