Well, we all know that ATI driver are always buggy... but its not it, and here is the prove:

1) Release Notes from the driver on the ati site states that it supports X.Org 7.4: https://a248.e.akamai.net/f/674/9206/0/www2.ati.com/drivers/linux/catalyst_811_linux.pdf

2) Archlinux Testing Repository uses that catalyst driver with kernel 2.6.27 and X.Org 7.4, and I already tested it and it works: http://www.archlinux.org/packages/?q=catalyst

3) CCux Linux uses on its testing repository on testing the kernel 2.6.27 and X.Org 7.4, not tested by me but they say it works: http://packages.ccux-linux.de/index.php?pdetail=7258

4) Ubuntu Jaunty 9.04 Alpha uses on its proprietary drivers system the fglrx 8.11 too and it uses kernel 2.6.27 and X.Org 7.4: http://packages.ubuntu.com/source/jaunty/fglrx-installer

5) Foresight Linux has ati-fglrx 8.11 trove on its @fl:2-devel repo... and uses kernel 2.6.27 and X.Org 7.4, and I tested it and it works: http://www.rpath.com/rbuilder/repos/foresight/troveInfo?t=ati-fglrx

6) Sabayon Linux Development Version 4 uses X.Org 7.4 and has ati-drivers 8.11 on entropy's repository: http://packages.sabayonlinux.org/

There may be others but these are the ones I found... so for some reason it doesn't work on paldo... We might not know now... but this is an specific paldo problem or it would work patchlessly on other distros...

Maybe release 8.12 will tell us whats wrong...
 
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OSs: Paldo-testing x86_64 :: HP Pavilion dv9680ez