Oh my. The upgrade mechanism forgot to update which kernel is loaded by default 
(/boot/grub/menu.lst default was 2 and not 0). Now everything works almost 
fine. I have desktop effects and xvideo (including the flickering bug).
The xvideo is definitely borked as it also sort of stays in fron (menus open 
behind).

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[fglrx] xv output not available for video playback
https://bugs.launchpad.net/bugs/197639
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