Are you actually typing "VGA=ATI" etc.? Because what you need to do is press F5 and append to the end of the existing kernel boot parameters (without touching any of the existing ones) one of the following (all lower case):
Try the first one (which is the closed-source ATI FGLRX a.k.a. Catalyst driver). If that does not work then try the second one (which is the open-source ATI Radeon driver). And if that does not work then try the third which is the open-source VESA driver.
EDIT: Actually, forget the first one, because Google tells me that your GPU is not supported by the closed-source FGLRX driver: http://www.thinkwiki.org/wiki/ATI_Mobility_Radeon_7500
N.B. For info. there used to be a an open-source driver called RadeonHD. That has been discontinued. Just to confuse matters, some people refer to the open-source Radeon driver as "ati", because:
Closed-source FGLRX/Catalyst driver
xorg.conf has: Driver "fglrx"
driver package is ati-drivers
Open-source Radeon driver:
xorg.conf has: Driver "ati" (or Driver "radeon")
driver package is xf86-video-ati (used to be xf86-video-radeon)
Open-source VESA driver:
xorg.conf has: Driver "vesa"
driver package is xf86-video-vesa