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.

I already went to the site after first buying the card and having the
same issue. It ended up that I got a driver for the card called fglrx,
which, after installing, I had to set as my driver through dpkg.
Unfortunately, after my upgrade to 8.04, Ubuntu's defaulted back to it's
included ATI driver - which is what gives me the resolution issue, and
I'm no longer able to choose a different driver through dpkg - all the
command "dpkg-reconfigure xserver-xorg" gives me now is a few options
about my keyboard and mouse, and nothing dealing with my monitor or
video card. So pretty much my issue isn't that I don't have the
necessary driver installed, it's that I can't tell my system to use the
proper driver. If there's another way of changing the driver, I should
be all set - I'm not too terribly concerned about 3D effects on this
system (half a gig of RAM and an 800mhz processor doesn't make it really
an eye-candy system, hence my preference for Fluxbox and XDM)

Not sure if it will help you like it did me as I was running nVidia...but,
before logging in I had to hit ctrl + alt + backspace to get to the
terminal. Then I was able to run my NAME.run file (the driver install
package) and then it loaded to this other screen after I logged in which
told me that the acceleration would be off but then I was able to go into
that and select the 'legacy' codec which was the package I had installed,
selected it, and after a reboot or two it ran. Then I went to
System>>Preferences>>Screen Resolutions and was able to change my
resolutions at that point (but not until AFTER I had the proper codec set
selected from the selection screen).

Live long and prosper. I had a similar problem after installing
8.04 which I posted before in this group. Without enabling the Nvidia
driver I had high resolution but was unable to run compiz. After
enabling the drive and rebooting I had only 640 X 480. I've neen in a
lot of forums and the #Ubuntu IRC channel for tech support. A LOT of
people are in the same boat as you are and that I was. It seems the
two hottest subjects in support places right now are video and wifi
for people who installed 8.04. The first advice that was given to me
for my Nvidia problem was to bypass the hardware drivers manager and
go straight to Nvidia and download their Linux driver. I ended up
with a .run file that I had no idea what to do with. So I went back
to #Ubuntu on irc and it was recommended instead that I use envy.
So I went into synaptic package manager and found envyNG and
downloaded it. It required reboot. After rebooting and before the
splash screen, if I remember correctly, it brought up a screen asking
which monitor and video card I used, and which resolution I wanted to
use. I input the correct info and continued with the reboot. I got
into Ubuntu and found that I still only had a max 800 X 600 out of a
possible 2560 X 1600 which is what the card is capable of. Well last
night I received two updates. One of which, except for my login
screen being a bit messed up, fixed my Nvidia problem. So now I have
to see if the same update will help my wifi on my laptop which was
also knocked out by 8.04. If all else fails perhaps the hardware info
update that fixed mine will fix yours.

Same thing here. The Nvidia install dropped me down to 640 also.
Re-booted & hit Esc, selecting Recovery Mode to get my choice of resolution
back.

Then on a 2nd PC which has only OB video, 8.4 left me with a max resolution
of only 800 x 600 on my 17" LCD.
However switching this PC over to a 19"CRT gave me the full range of res.
options.

I found that Compiz Fusion did not work properly until I had both my video card
and monitor configured properly. When I had the right card properly configured,
but it just showed a generic monitor it would give me hi res, but no desktop
effects. Once I configured for the proper monitor instead of a generic VGA
monitor, everything worked to my expectations. I have an HP 17 inch LCD monitor
with an Nvidia card. For some reason, some distros do not detect it and just
give me a generic 17 inch VGA. Usually the Nvidia card is properly detected and
I either get the right driver the first time or it offers to install the
restricted one.

I have used Envy with great success and urge you to give that a try for video
card drivers.