I booted using Natty live USB and it booted succesfully to Unity
interface with out proprietary drivers. It is quite possible that this
issue was caused by the previously installed ATI driver which is not
willing to leave the system.

I will try to make Lucid live USB to test open source ATI driver.

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https://bugs.launchpad.net/bugs/803064

Title:
  3D acceleration not enabled for radeon 5650 using open source ATI
  driver

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