JacobNZ: Edit: Just pasted the file from the main foler into the appdata one and did the changes and it worked. Have to play in windowed mode though. Not impressed, as this as compatability is one of GOGs main selling points and it can't even get that right.
This appears to be a bug in the more recent versions of the Nvidia driver, probably something GOG doesn't have control over. Though I agree that they should figure out a solution, e.g. having the installer detect the problematic driver and apply the appropriate configuration changes automatically.
I also agree that playing in windowed mode is less than optimal for a game that runs in 640x480. If fullscreen mode doesn't work with bool_UseHardware=0, try disabling double buffering as well. (bool_IsDoubleBuffer=0) With double buffering disabled, fullscreen mode should work a lot better.