I resolved that this morning after several cups of coffee: when I installed Windows 7 it seems 'hardware acceleration' was added to my Firefox preferences. (I don't remember doing this but I had some help installing it, and my assistant may have done it when adding new drivers to my video card.) In any event, I unchecked it and Gmail's text formatting options were restored.
Re MS updates - In XP, I had MS updates downloaded but I chose when or whether to install them - and I didn't do that until I'd done a little searching about their bugs. In Win 7, I'm going to follow your example and choose 'notify' only.