I have exactly the same card on my trusty old laptop, and assure you desktop effects do run. Not as smoothly as on a brand new C2D machine, but still well enough. As far as I know, this card is only supported by the open source radeon driver, so no use in trying out fglrx.
In fact, effects performance on KDE 4.2 is the best for me since the beginning of KDE 4. Some of the effects are still lagging, but shadows, wobbly windows, the magic lamp, the desktop cube, screen dimming to name just a few that come to mind work well. Perhaps you should look for the option that says disable functionality checks, and tick it. Otherwise, it would not work.
Another thing that comes to mind is to enable AIGLX in your xorg.conf, and disable XGL. I can give you more details as soon as I get home to my laptop, which shoud be in a few hours.
Lastly, you may check in System Settings, Default Application, Window Manager (may not recall it correctly), the last option is the default window manager, make sure it says KWin.
In 11.0 I used compiz as it was much smoother than kwin then, but in 11.1 compiz was somewhat problematic, and never gave me that kind of performance. So I removed it completely. However, I must say the wobbly and magic lamp on compiz worked better that the corresponding effects in kwin.
Perhaps someone could post more detailed info about manual configuration to tweak their performance?
Don’t get desparate, it does work! 