Don't know squat about ATI drivers, but you must be a System Of A Down fan huh?
btw, that error message is a classic!!! Comedy at its best ... cant find Xserver.... huh, wonder how your even reading the message ... LOL!
Heres the thing, your installing ATI the hard way. I would simply forget about installing the driver with the
sh./ati-driver_my_what-a-pain.run
and try and use envy instead. It should be listed under Applications>>System Tools>>envy (you are running 1.7 right?) or envyng if your actually running 1.9 with the theme package for 1.7
The error your getting is because you are still running X while installing the driver. This was the case with the driver from nvidia site also. You need to exit X and run it from command line. I think this might be done by hitting CNTRL+ALT+F3, then when done re-enter with CNTRL+ALT+F7. ..... Once again, I don't know squat about ATI drivers, but it prob. installs similar to the nvidia driver.