Here's the thing. At this point, NO 3Dfx driver I've used has EVER passed the D3D8.1 interface test, so you can pretty much say all drivers, new and old, are DX7 at best. Including this one. I've had this one work with nearly ALL my DX7 (and some DX8 games, occasionally) games.
What may be a good idea is to dual-boot Win2k and Win98SE, using Win98SE for FF7 will both allow you to play the game with a minimum of fuss (Chocobo Races work right out of the box, etc...), and the driver you install for Win98SE will not affect the drivers used, or the DirectX version installed, for Win2k. All you'd need to do is reboot into Win98SE for FF7, then just use Win2k for everything else.
Although, I have recently found that the 3DHQ 1.09Beta7 driver set will pass the D3D9 interface test but still fail the D3D8.1 test; but I'm running into problems in which FF7's not accessing DirectShow correctly with hardware acceleration (I think the Truemotion Codec somehow got uninstalled...), resulting in the game just hanging in a black screen but the audio still plays back, which basically means that I haven't got around to seeing if the 3DHQ Beta7 drivers exhibit the in-battle hanging problem you've described.