I have reinstalled ubuntu both in virtualbox on Macosx and on the hard disk (as 
a dual boot with Macosx).
The one in virtualbox in Macosx runs without problems. Quite stable.
The one on the hard disk is now at the '-17' kernel, but still has the video 
problem with VMs.
I have tried running windows 2003 in KVM/QEMU and got the video fade soon after 
install was complete.
I tried uninstalling KVM (no kernel module) and running virtualbox (with Win2k3 
guest). Again I got fade out.
I think my Hardy is unusable with VMs (but has been stable so far when VM not 
running).

I decided I must use virtualbox under Macosx for now, until some fix is 
reported. 
So I have stopped using ubuntu, because of this issue. It's a stopper.

p.s. My Xorg.0.log file reports many warning lines
"fbc already enabled on plane a, not enabling on plane a"

also some lines saying
"AIGLX: 3D driver claims not to support visual 0x23"
"AIGLX: 3D driver claims not to support visual 0x24"
etc

-- 
X video rendering intermittently fails
https://bugs.launchpad.net/bugs/226272
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