11.3 was the first driver which gave me an endless boot->BSOD->boot loop on XP with an HD4670, so 11.2 was the latest to work for me.
From 10.10 onwards I didn't have any issues with either IL-2 settings.
My old HD4670 provided a much smoother AA than my new GTX550Ti does and generally ATI cards are slightly above Nvidia pendants from a price vs. performance point of view, but to be honest all that driver hassles were a pain in the ass to me (ATI Tray Tools never worked for me for instance, so I always had to select profiles manually, which applied system-wide instead per-window as on Nvidia boards, just to mention two glitches), so I'm back a happy Nvidia user since a few weeks now and it's pretty unlikely that I'll ever return to ATI as long as I play IL-2.
But that's just a sidenote and slightly off-topic
This water effects thing at least works for both, you just have to remember to set water=2 on ATI machines instead of water=4 on Nvidias.
Best regards - Mike