I don't recall you being on the FF7 forum at Eidos....
I wish I'd seen this earlier...but I believe you shouldn't have updated DirectX, FF7 only likes working with older video drivers with the Rage card, and I don't think those older version drivers play well with the newer DirectX versions.
Right now I would suggest using the upsidedown patch, and playing in software mode.
If I'd seen this earlier, I would have suggested playing with Directsound in Basic Acceleration mode. It's what worked for me....