I've just installed Xubuntu 7.10 on a old HP Pavilion 6730, and I'm
encountering the exact same problem.  It seems to be related to the
video card.  When I switch from its native driver (i810) to a generic
driver, the terminal works.  but now, I have to use that lousy screen
resolution...

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Grafic mode crashes when switching to terminal
https://bugs.launchpad.net/bugs/131659
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