I had probably the same problem with an ATI 9100 (r200) using 
xserver-xorg-video-ati/xserver-xorg-video-radeon driver.
I noticed that 3d acceleration was working ("glxinfo|grep direct" showed 
"direct rendering: Yes" and glxgears worked fine), anyway seems like "lightdm" 
is not able to check it correctly.

Despite that, gdm seems to not have the same problem: doing "sudo 
dpkg-reconfigure gdm" and selecting "gdm" as default display manager solved my 
problem, though it is actually just a workaround.
Not sure if I'm completely right, but it seems to be at least related with 
lightdm, too.


** Also affects: lightdm (Ubuntu)
   Importance: Undecided
       Status: New

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https://bugs.launchpad.net/bugs/975414

Title:
  lightdm failed to run

Status in “lightdm” package in Ubuntu:
  New
Status in “xserver-xorg-video-ati” package in Ubuntu:
  Confirmed

Bug description:
  On my netbook dell inspiron 1501 lightdm failed to run.
  I see the message 
  "The system is running in low-graphics mode"
  The next step is proposed 
  - run in low-graphics mode for just one session
  - reconfigure graphics
  - trubleshoot the error
  - Exit to console login
  but all options are returned to me  to console login.

  If i`m use 
  exec gnome-session or exec gnome-shell in .xinitrc and run startx in tty1 
graphical environment is started successfully.

  ProblemType: Bug
  DistroRelease: Ubuntu 12.04
  Package: lightdm (not installed)
  ProcVersionSignature: Ubuntu 3.2.0-22.35-generic 3.2.14
  Uname: Linux 3.2.0-22-generic x86_64
  ApportVersion: 2.0-0ubuntu4
  Architecture: amd64
  Date: Fri Apr  6 22:41:39 2012
  InstallationMedia: Ubuntu 9.10 "Karmic Koala" - Release amd64 (20091027.1)
  ProcEnviron:
   LANGUAGE=ru_RU:ru:en_GB:en
   TERM=xterm
   PATH=(custom, no user)
   LANG=ru_RU.UTF-8
   SHELL=/bin/bash
  SourcePackage: lightdm
  UpgradeStatus: Upgraded to precise on 2012-03-30 (6 days ago)

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