You should be able to achieve 1024x768 in 16-bit on any 5500 built-in screen... in lower resolutions the display itself and the card are capable of rendering 32-bit. Sounds as though there is an issue with display drivers only partly supporting the inbuilt ATI graphics controller, in which case the above suggestion would be a good place to start. The other highly unlikely but still possible scenario is the machine is a frankenmac that has had a boardswap from a lesser machine, which is possible as there is fairly universal connectivity between many of the PowerPC-powered Performa desktop and AIO machines... In fact I even successfully plugged an early 6xxx-series Performa board into a 68k Performa 580 chassis. Was a simple matter of swapping the rear port bezel.

But yeh, I ran up to 9.1 on my 5500/225 and my 5500/250 black beast and both supported 1024x768 @ 16-bit... driver incompatibility due to an unsupported hardware system would seem most likely.