SOLUTION: Delete /etc/ati directory, install fglrx driver using the one
from www.atitech.com site. After you install via that .run script, type
aticonfig --initial ... This will create /etc/ati directory. Make a
backup of this directory. I made my backup to /etc/ati2 . After this,
enter into xwindows, go into hardware drivers. The driver will not be
enabled. After you enable the driver/it does its download and install
from somewhere, then copy your backup /etc/ati2 directory files to
/etc/ati ...

FIX.... PRESTO...

i have included my /etc/ati2 directory in a tar ball.

Someone give me a cookie.

** Attachment added: "ati2.tar"
   http://launchpadlibrarian.net/36490840/ati2.tar

-- 
fglrx fails at startup because of missing  amdpcsdb.default + removal leaves 
bad settings in Xorg.conf
https://bugs.launchpad.net/bugs/440233
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