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