the 1.4s and 1.6s have waaaay to many hardware differences for them to use the same kernel (its more than just ram and video encoder, the entire trace layout on teh board is different, so the signal timings are completely different, plus theres the xyclops chip instead of the TSOP, im sure the 3.3v to 5v standby changes some stuff too)
i think if this 1.7 actually exists (highly doubtful at this point) it would have to be either a slight revision of the 1.6 board (along the lines of 1.2 to 1.3, or 1.4 to 1.5) or an entirely new board altogether (again, doubtful that MS would make such a drastic change this late in the game)
and the 2004 philips in the 1.6s do read cd-r, at least the 4 ive come across read every cd-r i threw at them