Just incase you haven't found an answer. Here is my crosspost with a solution for these pesky old ATI Radeon cards:
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Here is my experience that might help some lost souls out there who hit on this forum because they are searching for x86/32bit legacy ATI drivers for Windows 7.
I decided to install Windows 7 RC on some legacy hardware. One a Pentium 4 2.4 using an ABit SR7-8X board with 512MB and an ATI Radeon 8500 graphics card. The other based on an Athlon XP 1600+ on an ASUS A7A266 board with 1.25GB using an ATI Radeon 9250.
As most found out, the Windows 7 install, if via a Vista upgrade or a fresh install will simply ignore the Radeon and install a standard VGA driver that is very slow and limited to 1280*1024 max resolution.
I then decided to install the latest XP ATI Catalyst drivers from AMD (6.11). Though the Catalyst is not supported, the driver install worked without a hitch. I could now set my resolution to 1920*1200 and everything looked fine. The next problem arose when I tried to shut down or reboot. Every single time ATI2dvag crashed just about at the end of the shutdown process with a BSOD. Twice it resulted in a corrupted registry, once unrecoverable necessitating a reinstall.
Back to search for a better solution. I then installed Vista and discovered that Microsoft installed a newer XDDM driver (6.14) as part of the XP upgrade. In Vista, this driver didn't crash the system under any circumstances I tried. As I couldn't find this driver on the net anywhere, I decided to extract it.
It is posted here:
http://rapidshare.com/files/231461174/Vista_ATI_Radeon_XDDM_6.14.10.6606.zip
Download it and you can now install this driver via the device manager/browse my computer for driver software/let me pick from a list. You might need to turn off "show compatible hardware" and then look for the extracted ".inf" file in the display directory.
Once installed, everything works fine for me on both machines. I get a 1.9 score for both cards on the Aero performance scale but a 1.0 for gaming graphics. My guess is that it doesn't even test the gaming score as it reports in the detailed performance information no dedicated graphics memory despite the fact that both of these cards have it.
I didn't test any games but ran DVD quality videos from the hard disk using Kmplayer and Media Player. Though Kmplayer clearly performed better, both of them did a good job. A few artifacts were visible in fast moving scenes but otherwise it was very watchable in 1920 * 1200 full screen mode.
This exercise demonstrates that Windows 7 works very nicely and MUCH better than Vista with legacy hardware, in fact with very old hardware. It also points out that systems with onboard chips or graphics cards based on the 7 series, 8 series or 9 series ATI Radeons are not a lost cause for Windows 7.