Apparently not a bug in the xorg ati driver but in the kernel.

Kernel 2.6.29.1 from the mainline ppa fixes the bug for me. Now my
radeon 9600XT works smoothly and it is notably faster at many things
than the proprietary driver.

Pre-built mainline kernels are a truly wonderful innovation!!!

Please backport the relevant changes from .29 to the jaunty kernel as
radeon 9600s (and probably other ATI cards) make the system unstable to
the point of being unusable when attempting opengl stuff with the
current stock kernel.

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[RV250][JAUNTY]  X Freezes with Radeon driver EXA/XAA Composite
https://bugs.launchpad.net/bugs/348332
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