I can confirm that adding 'HorizSync 31.50-50.00' to the "Monitor" section of 
xorg.conf resolved the issue for me.
I added the line to a blank xorg.conf, hit <ctrl><alt><backspace> and X started 
with 1024x768

Now is this a general 'fix' or does it only work for some computers?

** Attachment added: "Xorg.0.log with correct resolution recognized"
   http://launchpadlibrarian.net/22136499/Xorg.0.log

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[Xubuntu][Intrepid] wrong resolution with ATI Rage Mobility M3 AGP 2x (rev 02)
https://bugs.launchpad.net/bugs/284309
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