I am getting the exact same thing on my ThinkPad T40 with Mobility
Radeon 7500. Using fglrx is not an options as it does not support the
Radeon 7500 (r100 series) GPUs.

Basically if I do anything from no changes at all in this to arranging a
dual monitor setup and hitting test, this is the result I get.

I have tried this with the 'radeon' and 'ati' drivers to the same
effect.

I have attached the result.

This is from using it on the LiveCD. I am leaving my Feisty install well
intact with its custom dual monitor detection/xorg.conf setup.

** Attachment added: "The result of changing nothing and hitting Test in 
display-manager gtk"
   http://launchpadlibrarian.net/8981889/GutsyT40Display.jpg

-- 
displayconfig-gtk: "Test" fails (scramled screen) even with default settings
https://bugs.launchpad.net/bugs/134706
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