I just installed the Catalyst 3.7 driver/control panel set in both my computers. I did a little more than you describe.
First, I went into C:\ATI and deleted the entire folder and its contents.
Second, I went into Control Panel, Add-Remove Programs, and removed first the ATI Controller, and then the Video drivers.
Then I rebooted. The machine reverted to stock VGA and had to discover a lot of new stuff - video card, etc. I let it but cancelled every attempt to install XP drivers.
When it was stable, I then ran the Catalyst 3/7 downloaded file. This is the first one that does it all - controller and video drivers. After two reboots, my desktop was exactly as it was before I started. ATI did a good job on this one.