I think we have a *workaround* for this issue, at least in some cases, where the slowdown goes away, at the cost of some visual quality.
This is not a fix, and we ARE actively working with Nvidia to see if we can come up with a real fix for this problem, which we take very seriously. It took a while for us to get the contacts worked out, but we are seeing headway now. Whether a final fix is possible for us, I don't know.
Back to the workaround...
There is a variable that is
currently admin-only called "modellighting_enable." In testing on a 8800 GTX in Windows XP yesterday, I found that the slowdown went away when, as an admin, I disabled this variable. When disabled, you lose dynamic lighting on game objects, like players, NPCs, and hardlines, which makes them look flat and gray. A relatively average light level can be restored to them by using "modellighting_ambadd" variables, which, when modellighting_enable is off, can increase model lighting without making the models super-bright.
I also noticed that the slowdown occurred specifically when two animating mesh game objects, such as my player model plus an NPC, were moving. That information might help get a final fix for this, but we'll see.
The current plan is to try to get a hotfix out to you guys that will give you access to the "modellighting_enable" variable, so that you can make the adjustment in useropts if you like. The earliest we'll be able to get this in is probably not until a week or so after we get update 58 out and stabilized.
The normal problem:

With modellighting disabled:

What models look like normally:

What models look like with modellighting disabled, and "ambadd" used to compensate:

Possible useropts config for this would be something like
modelighting_enable = 0
modellighting_ambadd_r = 0.33
modellighting_ambadd_g = 0.33
modellighting_ambadd_b = 0.33