I'm having the same problem, using a GeForce 7600 as well. The -dxlevel 81 launch option seemed to work but makes it look quite a bit different from the screenshots, so I'd love to try and get this sorted out.
Another weird problem I had was that after removing the -dxlevel 81 setting from the launch options, it still had my hardware dxlevel set to 8.1 in the graphics options in-game, and when playing the mod every shader (bugged or not) is gone. I guess I could try and re-install to fix this.
lost_cause
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