FWIW, the log reports "Non RGB Multicolor Display".
Can you please try with the ati 6.7.194 driver (Gutsy Beta)?
** Changed in: xserver-xorg-video-ati (Ubuntu)
Assignee: (unassigned) => Tormod Volden (tormodvolden)
Status: New => Incomplete
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Color palette corruption on Radeon 7200 "All-In-Wonder"
https://bugs.launchpad.net/bugs/132622
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