opps! I spoke to soon. I have found the cause of the issue. It is DRI!!

I had to force ably enable the composite extension. Now this is counter
intuitive since ATI does not support composite, however by doing so the
xorg log file indicates that the driver detects that composite is on and
disables DRI and then everything works fine.

However if I set composite to "off" then I get the screen corruption and
hard freezes.

Hope this helps.

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7.04 (fglrx) display corruption and hard lock with X1650 on SIS chipset
https://bugs.launchpad.net/bugs/108402
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