It is likely an issue with the wrong driver. I suggest that you try a different
driver. I don't have an ATI card, but I faced a similar problem once with
another distro and my Nvidia card. When I found a driver that worked I was able
to work at a higher resolution. Going back to low res is a sure sign that either
the driver is not configured properly or it is the wrong driver. Since you tried
to configure it and it did not work, then I would look to the driver as the
culprit.

Since I don't use ATI, I do not know the situation with drivers. With Nvidia,
there are both open source ones and restricted ones and with my card, I can get
high resolution, with the open source drivers, but the 3D only works with the
restricted ones. You can compile a driver from source if you can't find one, but
I would try some restricted drivers first if you can find them for your card.
You can use Envy to find or make the driver. Some people prefer this route.

A brief search of UbuntuForms.org showed that ATI is less well supported than
Nvidia and therefore has fewer problems and that your card is mentioned as one
that others have had various problems with. There were 85 threads on your card
and Ubuntu. Not much comfort, but it seems that you are not alone. Perhaps if
your went to their site and looked through some of the posts you would get an
insight into your problem.