Hi again guys ;-)
Just finished running several searches, it seems this thread is also a 
duplicate of:
https://bugs.launchpad.net/ubuntu/+source/linux/+bug/541834

The #541834 thread states that this issue is resolved in 2.6.34-rc3.
You can all fetch and try yourselves at: 
http://kernel.ubuntu.com/~kernel-ppa/mainline/
I used RC6 and it works with KMS on (remember to turn it back on in grub ;-) )
Please try to check and see if this does solve your problem, if so, this bug 
should be marked as closed.

-- 
radeon KMS causes corrupt VGA output on X1400
https://bugs.launchpad.net/bugs/562138
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