I have encountered this same issue with my Asus M6Ne laptop, with an ATI
Mobility Radeon 9700, in Feisty Release.

The autogenerated xorg.conf did not include resolutions higher than
1024x768.  Switching to any resolutions higher than 1024x768 in the
capplet resulted in the same type of corruption present in the
screenshot attached to this bug.  My LCD has a native resolution of
1400x1050, when I added this resolution manually to xorg.conf, then
1400x1050 (my desired resolution) worked fine.  The problem also went
away if I renamed xorg.conf to xorg.conf.bak and let X autodetect
everything at startup.

I don't know how many chipsets are affected but it seems to me this is
pretty much a showstopper bug for non-technical users.

-- 
Corrupt screen when switching resolution
https://bugs.launchpad.net/bugs/84158
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