Okay, the issue you are experiencing is xserver-xorg-video-ati bug then.
However, the problems you are having with usplash, the image being
corrupted, is also a valid bug and is worth submitting.  Please include
a photograph of what it looks like if you do submit a bug.  Thanks!

** Changed in: xserver-xorg-video-ati (Ubuntu)
   Importance: Undecided => Medium
       Status: Incomplete => Confirmed

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[Hardy] system freezes after setting resolution to 1440 x 900 with Radeon 7500 
graphics card, when using DVI output, Acer AL1916W monitor
https://bugs.launchpad.net/bugs/234811
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