Torvalds was not referring to nVidia's video support for Linux when he made that statement; he was referring to their reluctance to cooperate with development efforts on their mobile chips, Tegra. nVidia has been far and away the best provider of first-class video driver support for free POSIX systems.
The X11 and Linux display landscape has changed dramatically over the last few years. I think that nVidia chose the wise strategy of "wait and see" to pinpoint what stabilizes and have since been working on porting pieces of their proprietary driver. The recent addition of XRandR 1.2+ support probably has more to do with the announcement of Optimus development than anything else, and this work is probably a precursor to a version that supports KMS and the other technologies that will be required for compatibility into the next five years of Linux desktop.
