I guess you use Jaunty where the Overlay option doesn't really work.

I am pretty sure that Windows Vista uses Overlay at least in full screen
video mode. Some say that the i965 chipset doesn't support Overlay but
then suddenly it was possible too.
https://bugs.launchpad.net/ubuntu/+source/xserver-xorg-video-
intel/+bug/152206/comments/15

I am not sure if there ever be a solution because the devs will always
find some cutting edge which could be integrated to mess things up
because Linux people live in the future and doesn't need working things
right now. That's why there is no real stable Xorg branch imho.

-- 
video tearing with textured video on intel card
https://bugs.launchpad.net/bugs/278318
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