Also playing at 1280x960 graphics maxed, 4AA and 8AF. AMD 3200+, 9800 Pro, 1 gig RAM, Audigy 2 ZS, 4.12 Cats.
The part where Gandalf fights the demon in the Mines is horrendous on my system. It will slow down to 1-2 FPS, then speed up, then slow down again when using powers.
Hmm. Does the slowdown start when he uses his powers? For me, I was having a screen blackout when Gandalf used his powers, but I was trying out overclocking my 6800. When I turned off OC'ing... everything went normal.
Also you might try disabling AA/AF if those are enabled, to see if that fixes it.