this is fixed by xorg_7.2-0ubuntu1 upload to feisty. Dexconf writes correct Fontpaths now, but we don't mess around with the old configs, that would just be too ugly. Instead, the server can look in both places for fonts.
** Changed in: xorg (Ubuntu)
Status: Confirmed => Fix Released
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failing to find fonts: dexconf writes bogus FontPaths
https://launchpad.net/bugs/63408
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