Although i'm not an expert on ATi, I can tell you that that is the graphics chip set that I was talking about, sometimes companies use Intel integrated, which I know shares memory with the system.
I take it you're running XP SP2?
I don't know what PC company you bought it from or what the deal was at the time, if you could find that out, in particular, looking for "Shared memory" that would give good clue.
One approach is reverting your catatlyst drivers to an earlier version, a newer version can corrupt old equipment by mistake, happened to me once with my old nVidia GeForce2, leaving me with two driver versions depending on what I was doing, or game I was playing.
Another idea, is to open your "task manager", "Alt+Ctrl+Delete" keys pressed once will bring it up, select the "performance" tab, and watch the values for the Physical memory and "Page file useage", if this page file is constanlty climbing, then your out of physical memory, and the value for the physical memory would be quite high.
Also, depending on your hard drive space and speed, you should look to see if your hard drive FREE SPACE is at least 20% of your total hard drive capacity, other wise Windows complains, if you have a 5400 RPM hard drive, consider replacing it with a faster one as the read and write cycles will be faster and cause less jitter and lag when the page file is used for thephysical memory over flow.
I also go by the rule of thumb that during normal usage, that is not counting on graphics intensive games like Uru or Crysis or Unreal Tournament, should generally not take up much more than 50% of your total physical memory capacity, less is better.
Also shut down things like virus scanners that are set to always cecking for viruses, or any unused programs will free up memory.
Last thing to try is a full system defrag, some people have noted huge improvments when they did, even when they have never done a defrag, and considering the age of your laptop, that would be a good place to start.