When installing Mach2 in Win2K, it's very important that you download and read the docs before you install. Just read the firest part about installing it. You may also have much better luck with a clean install of windows, but there's no guarantee. Also, you should download the newest version of Mach3 instead of Mach2. A final release version should be available in the next week or so, but whatever is currently available on the website should work fine for you.
If you want to try DOS software, there is TurboCNC from http://www.dakeng.com or CNC Zeus from http://www.cnczeus.com
Neither will work under Win2K, you must use a DOS boot disk or install DOS to your hard drive on it's own partition. If you use a boot disk, you most likely won't be able to access your hard drive.
All 3 of these are actually the machine controllers. Xylotex and Gecko's are motor drives, or drivers. The drives are controlled by the software.
Neither Xylotex nor Gecko is any more accurate than the other. They both do basically the same thing. The main difference is that the Gecko can run bigger motors, and can run smaller motors faster (usually).
As formotor size required, I'd consider 200 oz-in the minimum. Bigger is always better.
The tolerance you get is not so dependant on the motors used, as it is on the quality of construction and components used.
Ballscrews work fine, most commercial routers use them. (if they don't use rack and pinion). The only problem is keeping dust out of them.
Software backlash compensation is available, but anti backlash nuts is a better option, as software compensation will not always work well. Ballscrews can have backlash as well as acme.
CAM packages output g-code files. All the software controllers previously mentioned use a fairly generic form of g-code. Most CAM programs should be able to create useable code using a generic post processor.