Have you installed the latest PhysX drivers
? The demo should have installed drivers, though you wouldn't get hardware acceleration on an ATI card (PhysX isn't used enough in the game to for that to make a noticeable performance difference, though).
Did you try installing and running the demo as administrator?
a couple causes for this error and solutions can be found in the topic Win7x64 Nvi Phyxs error
There should be a demo released for DKS (remastered D2:ED + FoV) in a couple weeks, or so (no details of when, just that they would be working on one after the game goes gold and they finish some patches).First Aid Kit for Divinity IIFirst Aid : when Div2 does not start or crashes