You did of course completely remove the old ATI drivers you were using with the X1600XT, run a driver cleaner software and then install the latest ATI drivers for the new HD 3850, didn't you?"
No, I just got the new one and installed ...
Remove all your drivers, then try and install the latest ones again. A driver cleaner software might help you removing the drivers completely, first remove the drivers in add/remove programs and then use the software, reboot and install the lastest drivers. See if it works.