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Not an expert, but sounds like some sort of low-level(kernel driver or hardware) problem to me. I haven't experienced something like this on M96, but I a) only tried VNC for a few minutes and b) experimented mostly w/ text entry, so maybe the usb net utilization wasn't as high as in your case.
I'd still be interested to hear about using the WiFi for this, if someone has time to try. At the very least this will show if, the USB problems aside, the CPU is powerful enough to handle the bigger screen.
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