I added the following three options to my xorg.conf file

Section "Device"
Identifier "Configured Video Device"
Driver "fglrx"

Option "VideoOverlay" "on"
Option "OpenGLOverlay" "off"
Option "TexturedVideo" "on"


and in VLC player I used the XVideo extension output module.

I do not know if all of these things are required but using them means that my Ubuntu 8.04 video no longer looks like it is arriving from beyond the 91st dimension.

Maybe this post will help other users of this motherboard & integrated graphics card and save them the hassle of buying another card.