Seems the latest git for ati open source driver has the dri (direct rendering infrastructure) working. So, after installing the drivers from the source I was able to enabled desktop effects in my kde4. Yup sweetness of success atlast... so here are the steps to enable it...
Open your favorite command line too (konsole, terminal, xterm etc)
sudo apt-get install build-essential autoconf automake libtool pkg-config git-core
sudo apt-get install libdrm-dev x11proto-gl-dev mesa-common-dev xutils-dev x11proto-xf86dri-dev x11proto-fonts-dev x11proto-randr-dev x11proto-video-dev x11proto-xext-dev x11proto-xinerama-dev x11proto-render-dev xserver-xorg-dev
git clone git://anongit.freedesktop.org/xorg/driver/xf86-video-ati
cd xf86-video-ati
./autogen.sh --prefix=/usr --enable-dri
make
sudo make install
Now reboot your computer. I thought restarting kdm should have worked, but it seems the driver files are not getting loaded.
Open your system settings and go to desktop effects. Click enable, but before you press apply go to advanced and change the rendering to xrenderer. Now click apply and there you go.. linux eye kandy the way you want :-D....
some changes are done from the steps given
here. All credit goes to the post in the link and to open source ati developers... hats off to you guys...