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It's not about driver. There are card which do not support Dx9 like nVidia GeForce 4 MX500. Those cards can play only up to Dx8 games and there are cards like GeForce 4 Titanium 4200 which are not support fully Dx9. On them you can play Dx9 games, but without some features. Since you didn't give me a name of your card, solution is hard to say.
Allright the four red lights is an over heating error that MS could have taken care of. When you moved the system from being layed down to standing up if the CD was still moving you probably scratched and or broke your game inside the system. This is not covered under there warranty you will probably be stuck with a bill from MS for around 140$. sorry I hope this helps.