OK. I have this issue (ATI X1200). What I did to bypass:

1. copied the default XOrg configuration from /var/log/Xorg.*.log (it is 
printed there) into /etc/X11/xorg.conf;
2. Edited /etc/X11/xorg.conf, and disabled the ATI driver section;
3. bounced X.

Now I am running with VESA, and can work nicely. Of course, I do not
have whatever fancy thingies I might had before, but it works.

** Changed in: xserver-xorg-video-ati (Ubuntu)
   Importance: Undecided => Medium

-- 
low graphics mode after today's update
https://bugs.launchpad.net/bugs/495973
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