The only "problem" can be traced to your RAM. Generally for gaming these days 2GB is a must have (but not necessary). That's the only slow down point I can see in your rig everything else looks fine.
For comparison I run maxed (minus motion blur (1. can't turn it on without a reg hack 2. makes the game look like a POS)), 1600x1200, 6x AA, 16x AF.
So there shouldn't be any reasons for a lag
P.S. my fps count comes from FRAPS as well as ATI Tools (which lags behind FRAPS about 1/2 second) the reason everything looks smooth is because the maximum fps a human eye can see is 24fps (if you run 60fps and there is a sudden drop you will noticce it however) so a 2fps difference isn't going to affect you much and you won't notice lag. Below 20fps is where it becomes noticably jumpy.
NOS: FRAPS takes very little from a CPU it's about as accurate as one can get. With his rig his CPU has plenty of extra overhead for a small app like FRAPS