Hi robboman,
It seems like the video drivers are not properly installed:
DirectDraw: Warning - Device does not support hardware stretching
DirectDraw: Warning - Device may not perform well for DirectDraw rendering
DirectDraw: Error 88760233 creating blit surface
Go to command line, type dxdiag, go to the Screen tab. The option "DirectDraw accelaration" should be enabled. If it's disabled, then don't search any more.
You need to uninstall the video drivers, clean all remaining ATI software (run CatUninstaller starting in Safe Mode
http://downloads.guru3d.com/The-Catalyst-Uninstaller-download-1275.html), and reinstall the drivers again.
Then check that everything is fine in dxdiag. If DirectDraw's acceleration is still disabled, you may need to repeat the process (yes, maybe several times)
This is a common problem, unfortunately, specially with customized Windows installations. This Windows distributions often ship newer versions of the ATI drivers that get mixed with ours for some reason, creating a lot of problems.