Thrasher
Wheeee!
It's an easy thing to try. But it IS a long shot. As I said before, it's most likely an NVIDIA driver or settings issue, and darkling's research seems to confirm that.
There certainly is an option for PhysX in the control panel. There also is an option for the other thing I mentioned, as I remember needing to change it to get Wizardry 8 to work (I've had Nvidia cards nearly exclusively up til last summer). As for how to find them- well, I can't walk you through the actual control panel windows. Is your nvidia control panel set to 'advanced' mode?
It looks like the PhysX option is now called "Select Physx Processor" and you'd select "CPU" to disable GPU PhysX calculations. As for why this works even though the game doesn't use PhysX, I honestly do not know. I am relating something that many other people have claimed works for them. It certainly is possible they're all wrong, but it is the most common solution that yielded "Hey it's better!" responses that I've seen. It feels like there's a logic behind it, too.
Kinda glad I went ATI this round.
Also, XP compatibility mode will not help with this issue. It helps with about 0 issues, from what I've see.