It turns out the issue is related to the new acceleration method in
Karmic. Adding the following to the Device section fixes it.

Option      "AccelMethod" "EXA"

Now I wonder, is this because of my video card or just the current state
of ATI drivers? If so, will it be resolved? Should I file a new bug?

Thanks!

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Notification and similar dialogs are displaying corrupted after update on Karmic
https://bugs.launchpad.net/bugs/416001
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