I have the same (at least very similar) problems with a Radeon RV250
(Mobility FireGL 9000) running the latest radeon driver (xserver-xorg-
video-ati 1:6.13.0-1ubuntu5). The issue obviously (I tried it only
shortly and then went on to 10.04) also occured with ubuntu 9.10.

Contrary to other reports, on my machine things get even worse when I
turn kernel mode setting off (Desktop background and certain application
windows like firefox totally black).

(See also http://ubuntuforums.org/showthread.php?p=9106012)

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[Legacy Radeon cards] Desktop effects/compiz: dim display when zooming
https://bugs.launchpad.net/bugs/539163
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