I have very similar problems but the video driver in use is xserver-
xorg-video-intel . In addition to "Ubuntu running in low-graphics mode"
error though all video is unusable--drop to command prompt, etc, produce
a few colored pixels on the virtual terminals but that's all. Recovery
mode boots are also unusable on this machine with the 2.6.31-15 kernel
and 1:7.4+3ubuntu10 xserver-related packages installed.

The only reliably working configuration was to revert back to the
1:7.4+3ubuntu7 versions of all xserver packages and the 2.6.31-14
kernel.

-- 
afte recent update which included xorg, xserver etc causes low-graphics mode 
error at start
https://bugs.launchpad.net/bugs/491483
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