Did you follow ATI's installation instructions for the new catalyst drivers ?
There is a certain way to install drivers on win xp, that always works,and that is not letting windows do it automatically.
There seems to be a problem with windows installer, installing some files into system32, instead of system,
some games reyuire certain dll's in the system folder and or in the system32 folder.
I cured a problem I had with ASPI by copying a file from system32 to system, it worked fine after that,so I think that this could be a cause for alot of game related problems.
Alot of game programmers still use win 98 which only has the one system files folder, not two like win XP does.