1. I've seen some of benchmarks that would suggest video drivers _do_ often get slightly slower as the version number increases, probably due to increased internal complexity. With a new card it's a good idea to keep the drivers up to date due to compatibility tweaks and performance optimizations that usually far outweigh any little slowdown, but I doubt they've touched any GeForce FX-specific code in years - so having the latest driver may not be the best idea. Can't really recommend a specific driver version as I've never owned a GeForce FX card.
2. IIRC the GeForce FX series were the first video cards ever to support Pixel Shader 2.0, which allowed much more complex shading effects and easier shader programming. However, the support isn't very good; most games that make heavy use of model 2.0 shaders run like crap on the fastest GeForce FX cards (Half-Life 2 and its heavy use of 2.0 shaders sold a _lot_ of Radeon cards back when Nvidia's latest was the GeForce FX). So yes, it may be a good idea to avoid 2.0 shaders on a GeForce FX. If the game doesn't run any faster after disabling them externally it's possible the game has some code in place to avoid 2.0 shaders entirely on a GeForce FX, or the external tool doesn't work.
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