Regarding your video card problem. It's common for the crappy ATI thermal paste to not always be providing a good thermal medium between your the core and the heatsink. So your heatsink may be working, but it's possible that perhaps the thermal paste is only covering 40% of the core which would result in over-heating.
This is what you can do:
A) If your card is still under warranty try to return it. If the card is artifacting at default speeds then it's defective.
B) If your card is not under warranty anymore buy some Ceramique or Artic Silver 5 and replace the stock thermal goo. And like other people have mentioned, adding an after-market VGA cooler should increase your OC by a sizeable amount. The Artic Cooling VGA silencer is a great option and only costs $10-$15.
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"A casual stroll through the lunatic asylum shows us that faith proves nothing." - Friedrich Nietzsche
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