I had a similar issue after upgrading from Gutsy to Hardy. Everything
rendered terribly slow, and although the "Enabled" checkbox for the ATI
driver was checked off, it said "Not In Use" next to it. I looked at an
unofficial wiki for ATI driver support on Ubuntu and here's what I
suggest doing:

Check if you have the package "xserver-glx" installed. If so, Ubuntu may
be using the GLX driver even though you told it to use the ATI driver.
To double-check if that's what's really happening, type "glxinfo" (you
may want to use " | less" afterwards since sometimes the output can be
lengthy). If you don't see any "ATI" vender strings there, but see
vendor strings with "MESA" in it, your Ubuntu is using the wrong driver.
I personally was able to remedy this by simply uninstalling xserver-glx,
logging out, rebooting X Server and then logging back in.

Hope this helps!

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Hardy: Graphics driver "not in use"
https://bugs.launchpad.net/bugs/224130
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