So the damage die is when you actually roll damage - rolling to hit is a separate thing. what it means is that after you've rolled to hit, and hit successfully, when the damage is rolled, any 1s or 2s you roll on that damage roll (ie. either of the 2 d6s you roll for damage with a great sword) get re-rolled; if you missed with the attack anyway, this doesn't come into play.
That Aside: Currently, natural 1s in Larian's code trump everything, and currently even negate other abilities that could or should prevent them, and that's a problem in and of itself. So, even if you had an ability that let you re-roll an attack roll, a natural 1 would preclude your ability to use it, because the attack would automatically process a miss, before getting to the trigger point. This is a flaw in their design right now.
