Video drivers not supporting 320x240? Oh man, that's really depressing.
I don't have any suggestions offhand, other than to contact ATI and, if indeed that is the issue, ask them to please reinstate support for the old resolutions.
Or maybe there's something out there already? That'll be breaking masses of old games, so it should be easy to find some discussions. I'd be inclined to head over to vogons.zetafleet.com