Comment 35 for bug 1541082

Had a closer look at your Xorg.log:

[ 25.862] (II) LoadModule: "r128"
[ 25.863] (WW) Warning, couldn't open module r128
[ 25.863] (II) UnloadModule: "r128"
[ 25.863] (II) Unloading r128
[ 25.896] (EE) Failed to load module "r128" (module does not exist, 0)
[ 25.896] (II) LoadModule: "modesetting"

xorg tries to load the appropriate driver for your ATI Rage, wich is "r128". Since this driver is not found, it uses the generic "modesetting" driver, which in turn resorts to a 15bpp framebuffer.

Just found out that the needed xserver-xorg-video-r128 package is no longer installed by default in Yakkety. Maybe this is also the case in Xenial. So the easy solution for you would be to "sudo apt-get install xserver-xorg-video-r128" and reboot. Maybe you get an accelerated 24bpp desktop again without needing a supplementary xorg.conf!

>Since the dev had gotten back to me to post the screen shot, and then,
>nothing posted/commented back about it, I've come to the conclusion that it
>is just the image file itself that is a low spec/low res image. Other
>backgrounds, like the "cosmos" one that changes images, some of them are
>perfect, and others have this low resolution issue.

Nope it is the other way round. The background image is 24bpp but the display driver has to show it on an 15/16bpp screen - it needs to reduce the colours somehow which makes the image appear blotchy. Icons don't have that many gradients which leaves them looking crisp on 15/16bpp.