So I don't have the greatest PC ever, but it is certainly well beyond what this game requires. Despite that, I have to turn all of the graphical settings down to their absolute lowest, run at the lowest possible resolution and turn off the audio effects, just to get enough framerate out of the game to move my character around. Even with that, the game is still unplayable, since as soon as any other action appears on the screen, the framerate tanks completely. This is with a fresh download and install of the game, current drivers and current DX. System specs:

Windows XP SP3
Intel P4 3.0GHz w/ HT
3.0 GB RAM
256 MB GeForce 7600 GS
SoundMAX Audio (on board/integrated sound)*
Widescreen monitor (game performance the same using either widescreen or 4:3 resolutions)

Note that I did cancel the PhysX install for the game, since I already have a newer version installed. Also, running the game in "safe mode" (windowed 640X480) does seem to work OK... but I shouldn't have to run the game in a tiny window just to play it.

Thanks in advance for any help.

EDIT
*I have since replaced the on-board sound with an Audigy LS I had lying around. Zero difference in game performance.

If you're feeling up to it i guess you could try to unistall PhysX, let the game install it and then install the current version on top of that.
Dunno if it will solve anything, but that's probably what i'd try first.

Thought you might be on to something there after my first PhysX uninstall attempt produced a mysterious "Error 1606", but that turned out to be unrelated (long story, involves an ill-advised registry edit I made). However, running the game with either the provided version of PhysX or the current version does not change the terrible performance at all. Any other ideas?
EDIT - I managed to produce a slight improvement using TWCP. Through that, I was able to disable HDR, dynamic lighting, grass, shadows and limit the particle effects. After that, I was able to increase all of the in-game settings like texture detail and such to about 50% before the performance tanked again. Still, it seems to me that I shouldn't have to do all this just to get this particular game to run at remotely acceptable levels. If anyone has any ideas on what else I might be able to do or what might be the actual cause of this problem, I am open to further suggestions.

You mentioned you have your stuff uptodate - drivers, DirectX, etc, - so i'm not sure what coud be going on there, but i agree with you when you say you shouldn't be having that kind of performance issues with those specs.
Have you tried lowering Sound HW acceleration ? Probably a long shot, but it can't hurt to give a try.
I have a machine with similar specs (although an ATI card). I'm going to see about installing TW on it to see what kind of performance i get.

Lowering the sound acceleration didn't help with the framerate at all. In fact, lowering it too far actually made the whole situation worse, as on top of choppy video performance, I also had choppy sound performance. I honestly wouldn't have expected the sound acceleration trick to work anyway, since that is usually something that only affects much older games than this one.

One of the reviewers in this thread has a rig similar to yours :
http://www.hawkee.com/shop/prod/2276399/
"My once-glorious but now aging 4 year-old, custom-made PC equipped with 3 GHz P4 HT CPU with 2 GB of RAM and NVIDIA 7800 GS has no problem running this game beautifully with all the effects turned on and maxed out. The loading time is only 3-7 seconds."
This suggests your problem may be hardware or driver related. Have you tried playing the game with the on-board sound disabled ?

That system sounds virtually identical to mine, both in the hardware and the description of it ("once glorious... now aging" perfect description).
The problem with disabling on-board sound is I only have the on-board sound. I removed my dedicated sound card (SB Audigy LS) in order to improve overall performance of this system. This would be the first game out of dozens that I have tried that did NOT work better using the on-board sound over the dedicated sound card. Besides, the game won't even launch if I have no sound hardware at all. I suppose I could dig out the old sound card and reinstall it... Ah well, any excuse to crack open the case and fool around with the components. I'll give it a shot.
EDIT - I decided to try launching the game after disabling and uninstalling my on-board sound. To my surprise, the game did actually launch, but when I tried starting a new game, there was absolutely no discernible difference in the performance. The framerate was still so low that I couldn't even move my character around. I'm not going to bother re-installing my old sound card at this point, since this is clearly not related to the sound hardware at all. The on-board sound seems good enough for most everything, so I'll just re-enable that.
EDIT 2 - Okay, now things are getting a bit weird. On a whim, I decided to uninstall my anti-virus, just to see if that would make a difference... it did, but only partially. The game is still mostly unplayable, but I can now move around with some degree of certainty. This result would seem to indicate the problem has something to do with resource usage not related to my video card, but rather simple processor or RAM. So, I decided to mess with the processor affinity and priority. Changing the affinity didn't make a difference (it usually never does with a simple HT processor), but upping the priority to "High" produced enormous results. I was actually able to complete the first quest, though during combat it did get a bit choppy (pun very much intended). Though this does appear to be a solution for now, it still does not make any sense that I would have to do this to get basic usable performance out of the game.

It makes perfect sense, if you don't have the processing power to run the game then you will end up with a very choppy game. All you did was up the priority of the game so it could use the processor more often.
So it sounds like your processor is under a bit too much load. Try closing down a bunch of things before starting the game, or create a new profile in windows specifically for gaming that has only essentials open. Also do a full system scan for viruses and spyware, maybe even defragment your system and if you are willing, clean your registry (no telling how messy it has become). If you are running out of harddrive space also get a bit more, always keep at least 5 gig spare on your c: drive.

You're right, it would make sense... if it wasn't for the fact that I already run a very minimalist system (all extra services and startup apps eliminated) and I have almost twice the processor and 6 times the RAM this game requires. The system is completely virus and spyware free, it was defragged just prior to installation, I have over 20GB of free space and I clean the registry on a regular basis (that is what indirectly led to my PhysX uninstall issues earlier). My biggest resource hog was my anti-virus and that is no longer an issue. At idle, I have more than 90% processor and over 2.5 GB of RAM available. I have dual hard drives in my system and I keep the swap file on the secondary drive (not the same drive the game is installed on). There is absolutely no reason I should have to do any of the things I have done to try getting this game running smoothly and I don't have to do this for any other games (both more and less demanding games). If there were something screwing up my resource usage so badly as to affect this game, it should also affect others but it does not.
Just to add another wrinkle to this, I happen to dual boot Windows and Ubuntu Linux, so I decided to give the game a shot in Linux via Wine. My Ubuntu installation is installed via the Wubi method, so it is a loopback-based virtual file system, which uses a lot more resources than a standard install. The game runs as well, if not better, in that environment than it does in my Windows environment with the processor priority tweaked (still not perfect, though). That tells me this can't be a hardware issue of any kind and I'm back again to software or resources, which does not make any sense at all.

So the obvious thing to do is to set perfmon running while playing the game. Set traces for the amount of processor used, amount of memory used, disk activity, and if you can find the trace (I can't, but I'm no pro with perfmon) then try to see how much if any of your graphics card is being used.
If I were a gambling man, I would have money on the problem being that for some reason it is not using your graphics card, and is instead attempting software rendering. Luckily I'm not a gambling man, and I haven't even tried installing this game yet, so I don't know if there is such an option.

That was a good idea, but it just left me with more questions. Perfmon shows that the processor usage stays fairly steady at about 50%, with occasional spikes as high as 65-70%. Memory usage is minimal, with an average of about 2250MB of free RAM. Page file usage is even more surprising, as it is only using about 0.25% of the page file at any given time...
And now it has to get even weirder (if that's possible). After ALT-TABbing between the game and Perfmon a few times, it now runs almost fine. It's still quite choppy, but it is a damn sight better than it was. I was able to increase all of the graphical settings to the max without seeing even a slight decrease in that performance. It is now playable to a degree. Makes me wonder if that performance improvement I saw after increasing the processor priority was just a side effect of having to ALT-TAB between the game and the Task Manager...
Just to test the theory, I exited and reloaded the game. At launch, performance of the game, or more accurately, the complete lack of performance, was the worst I have seen yet (not really surprising with all the graphics set to "Wow!"), but after an ALT-TAB, the game actually works. I still think I should be getting better performance than I am and I shouldn't have to invoke the mysterious " Scroll of ALT-TAB" to make the game work, but it seems I can actually play it now.

I'm sorry i didn't get back to you like i said i would cogadh, but i'm having some problems of my own with the machine i mentioned.
Right now i'm having fun with its display stuck @ 640x480 and 4 or 8 bits color depth the moment i install any ATI driver for my card. I also have a few light green pixels popping up on the display which i can't quite explain.
Anyway, i'm on the process of trying to figure out what the hell happened here, but i wanted to let you know why i didn't post back.

I'm glad you have found a solution, may not be ideal but at least it works.
As for the reason it works ... I am clueless. Still not the weirdest fix I have ever heard of, that honor goes to the ghostbusters game. To get a smooth framerate in that you must set the processor priority to low, I still have no idea why this works but this is a known fix and I've used it myself.

I wouldn't exactly call it a solution. The game is now playable (so far), but it still runs with a headache-inducing choppiness to it and no changes I make seem to make that go away. All it does is make the image quality look worse. I'm stumped as to what could be the cause at this point as there is no logical reason for it to work like this and even the illogical reasons seem to have been debunked.

i have no solution but wanted to add that NOT installing the Physx-package with the game should not affect performance at all. I checked what the game installs and it is a version that is included in the latest official nvidia physx-package that comes with the nvidia drivers. I did with and without Phsyx and it did not change much .
What you could try is that: start game-menue. go to task manager -> processes -> right-click the twoworlds-exe and set to one cpu/apply. then do it again and set it back to 2cpus. You have hyperthreading and I know of my old P4 which had troubles with HT enabled in a few games.