I had the same situation when installed Fedora 7 onto my Dell Inspiron 1501. Precompiled ATI drivers (fglrx) didn't work and X server didn't started. But Ubuntu 7.04 coped with my video card and worked (after restricted ATI drivers installation).
First of all find section "Device" in your xorg.conf and replace "Driver" to "radeon". In my case it looked so:
Section "Device"
Identifier "ATI Technologies Inc RS485 [Radeon Xpress 1100 IGP]"
Driver "radeon"
Busid "PCI:1:5:0"
EndSection
And restart X. It should load native Ubuntu's ATI drivers.
Then go to
http://ati.amd.com/support/driver.html and download latest ATI driver installer. It should help.
Good luck!