HL2 Update mod works fine (for me) with Oculus Runtime 0.6.0.1 and nvidia 353.30, with todays SteamVR update (didn't try it before with those drivers). I've switched to extended mode and started "Virtual Reality Mode" for Steam (listed under view). Then started HL2 Update from there.
I have -console as launch option for the game and the following in the autoexec.cfg:
bind v vr_reset_home_pos
bind "Z" vr_cycle_aim_move_mode
One more important thing, my desktop was at 75hz.
Your desktop resolution does not have to be the same as your in-game resolution. If your screen works fine at 1280x720@75hz, go for that one.
I found a workaround to play hl2 in win 10 + runtime 0.7.
Check and tell me if it works for you.