> PS - I also did try changing ati to radeon in the Xorg.conf

Have you tried also to change ati to vesa ?

Also I noticed gdm was still alive and I had to kill it before starting it 
again:
# killall -TERM gdm
# /etc/init.d/gdm start

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X in 6.10 ISO Cd installer doesn't work for ATI card
https://launchpad.net/bugs/68433

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