Turning KMS on didn't work for me either - I also got mangled fonts plus
other corruptions. I attach the output of dmesg, there are some error
messages like...

[15318.655652] i2c-adapter i2c-1: unable to read EDID block.
[15318.655657] radeon 0000:01:00.0: LVDS-1: no EDID data

I wonder if we should open another bug, maybe at bugs.freedesktop.org,
to see which ATI chips are affected...


01:00.0 VGA compatible controller [0300]: ATI Technologies Inc Radeon RV250 
[Mobility FireGL 9000] [1002:4c66] (rev 01)

** Attachment added: "dmesg"
   http://launchpadlibrarian.net/33726635/dmesg

-- 
(Needs KMS) Background and full screen apps don't show up when Normal Visual 
Effects on (Radeon 7500) 
https://bugs.launchpad.net/bugs/444139
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which is the registrant for xserver-xorg-driver-ati.

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