looking at your diag file i think problem is here
Card name: ATI Technologies, Inc. RAGE XL PCI
Manufacturer: ATI Technologies, Inc.
Chip type: ATI RAGE XL PCI
DAC type: ATI Internal DAC
Device Key: Enum\PCI\VEN_1002&DEV_4752&SUBSYS_80081002&REV_27
Display Memory: 8.0 MB
Current Mode: 1024 x 768 (32 bit) (60Hz)
im not really sure that your Graphics card in your PC is capable to run LFS, and render corretly or sufficently. It looks as though you have an AGP slot perhaps you can use to get a card that will run LFS.
Hope this helps.
*edit*
only info i can find on whats needed to run LFS (thanks illegal)
http://forum.rscnet.org/showpo ... p=2513430&postcount=3