Sounds-
It really bothers me that you were previously able to use this same system. openGL is/was obviously supported by your card and well there wasn't any notes on the updates regarding the graphic subsystem... still on same havok engine too. YOU haven't changed drivers.... problem is likely somewhere else.
I'm wishing you didn't uninstall the 1.6 version before updating... I knew this thing has to be idiot proofed enough for that not to be necessary, or if it was, it would do it for you or specifically make you during the upgrade process.... think of all the novice residents.
No one would specifically know if that could cause the unexpected behavior you are experiencing, but one thing that quickly comes to mind... if the uninstall cleans application settings completely, you'd lose your graphics preferences and such.
I hate asking questions that seem obvious, but I don't have a clue what your troubleshooting has been. Have you tried every combination of the SL graphics preferences? AGP on/off? Smaller vid memory size? Fullscreen/not etc?
I'd rather go to the dentist than troubleshoot through someone else's hands/eyes, it's so counterintuitive & there are so many billions of possible problems and solutions... others feel this way too; you're going to have to try very hard from your end.
The BEST advice I could give anyone seeking techinical help anywhere is to give as much information as possible. At this point, you haven't mentioned where the trouble begins, what the error message or behavior is. Don't ever give up! You've never tried EVERYthing! and if you tell anyone you've tried anything, there is nothing left for them to try!?
A forum posting costs but a lil effort, list everything you've tried, exactly how you tried it. Meanwhile if a solution is ever discovered, the whole timeline is fully visible for the next person w/ the same or similar problem.
The way out is through?

-EZ