Here is a related (or duplicate) bug report:
https://bugs.launchpad.net/ubuntu/+source/xserver-xgl/+bug/114127
Here is a related topic on Ubuntu forums:
http://ubuntuforums.org/showthread.php?t=441561

I see this problem in compiz when using open source ATI video driver (no
xserver-xgl), and also when using proprietary ATI driver fglrx with
xserver-xgl.

Indeed, I see the problem even when I just enable
System->Preferences->Appearance->Visual Effects->Normal (i.e. no compiz
effects at all).

For me. video plays fine in mplayer, even when spinning the cube while
in fullscreen, although fullscreen does flicker a bit if I move the
mouse.

The artifacts are especially bad when slowing dragging windows up or
down. I attach a screenshot.

My specs:
HP NW8240 Laptop
ATI Technologies Inc Radeon Mobility X700 (PCIE)
Ubuntu v7.10
compiz 0.6.0+git20071008-0ubuntu1.1
libgl1-mesa-glx v7.0.1-1ubuntu3
libgl1-mesa-dri v7.0.1-1ubuntu3
linux-image v2.6.22-14-pentm+suspend2 (tuxonice patch, compiled for Pentium M)
xserver-xorg-video-ati v6.7.197-1ubuntu1~tormod (patched to fix problem with 
LCD display sync)
xserver-xorg v7.2-5ubuntu13

** Attachment added: "compiz_mouse_pointer_bugs2.png"
   http://launchpadlibrarian.net/11086837/compiz_mouse_pointer_bugs2.png

-- 
[compiz] Mouse cursor leaves trails when clicking or dragging
https://bugs.launchpad.net/bugs/175075
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