Jerky graphics with the Radeon HD2400 Pro AGP

Hi.
This is actually my first real shot at ubuntu. I am hoping it can become the OS of choice at home :)

Background:
I have an ATI Radeon HD2400 Pro AGP card. Works fine on Windows XP at 1440x900x32.
Just installed Ubuntu 9.10

Problem:
Everything looks fine until movement is involved. When I try to play an XVID video (which worked fine without the driver) or preview a screen saver, it is completely jerky.
The REALLY odd thing here, which leads me to believe that the problem is in the X configuration and not the driver is that when the screen saver is triggered normally (after so and so minutes), it runs smoothly!

Things I have already checked or tried:
1. Tried installing the FGLRX driver 3 different ways (System>Admin>HW Drivers, envyng, and currently running the latest AMD/ATI driver for linux x86 32bit platforms), with the same result - everything looks fine until stuff starts moving,
2. System load during jerky playback - CPU and HDD are completely relaxed
3. Used aticonfig to test GPU load during jerky playback. It was dancing around 90%-99%. This is definitely not right. Wrote a little script to output GPU load during (smooth!) screen saver operation and it was around 10% (which is normal).
4. Tried fiddling around with xorg.conf but no success there. (its listed below)

It looks as though some kind of acceleration flag or option is missing during normal operation, but kicks in when the screen saver starts.

Any help would be greatly appreciated!

xorg.conf contents:

Section "ServerLayout"
        Identifier "aticonfig Layout"
        Screen 0 "aticonfig-Screen[0]-0" 0 0
EndSection

Section "Files"
EndSection

Section "Module"
        Load "dri"
        Load "GLcore"
EndSection

Section "ServerFlags"
        Option "Xinerama" "off"
EndSection

Section "Monitor"
        Identifier "aticonfig-Monitor[0]-0"
        Option "VendorName" "ATI Proprietary Driver"
        Option "ModelName" "Generic Autodetecting Monitor"
        Option "DPMS" "true"
EndSection

Section "Monitor"
        Identifier "0-DFP2"
        Option "VendorName" "ATI Proprietary Driver"
        Option "ModelName" "Generic Autodetecting Monitor"
        Option "DPMS" "true"
        Option "PreferredMode" "1440x900"
        Option "TargetRefresh" "60"
        Option "Position" "0 0"
        Option "Rotate" "normal"
        Option "Disable" "false"
EndSection

Section "Device"
        Identifier "Default Device"
        Driver "vesa"
EndSection

Section "Device"
        Identifier "aticonfig-Device[0]-0"
        Driver "fglrx"
        Option "Monitor-DFP2" "0-DFP2"
        BusID "PCI:1:0:0"
EndSection

Section "Screen"
        Identifier "Default Screen"
        DefaultDepth 24
EndSection

Section "Screen"
        Identifier "aticonfig-Screen[0]-0"
        Device "aticonfig-Device[0]-0"
        Monitor "aticonfig-Monitor[0]-0"
        DefaultDepth 24
        SubSection "Display"
                Viewport 0 0
                Depth 24
        EndSubSection
EndSection

xrandr output:

root@LIGHTNING:~# xrandr
Screen 0: minimum 320 x 200, current 1440 x 900, maximum 1440 x 1440
DFP2 connected 1440x900+0+0 (normal left inverted right x axis y axis) 408mm x 255mm
   1440x900 59.9*+
   640x400 59.9 + 75.1
   320x200 60.1 + 75.5
   1280x1024 75.0 60.0
   1280x960 75.0 60.0
   1152x864 75.0 60.0
   1280x768 74.9 59.9
   1280x720 60.0
   1024x768 75.0 70.1 60.0
   1152x648 60.0
   800x600 75.0 70.0 60.3 56.2
   720x480 60.0
   640x480 75.0 60.0
   640x432 60.0
   512x384 60.0 74.9
   400x300 75.0 60.7
   320x240 75.6 60.0
CRT1 disconnected (normal left inverted right x axis y axis)
CRT2 disconnected (normal left inverted right x axis y axis)
TV disconnected (normal left inverted right x axis y axis)
COMPONENT_VIDEO disconnected (normal left inverted right x axis y axis)