Just to make sure I understand the problem I'm having launching the game. I get the following error message.
This application ahs failed to start because X3DAudio1_1.dll was not found. Re-installing the application may fix this problem.
From what i've read this could be happening because I'm not on DX9, instead I'm on DX11. I also had an error message stating that my nvidia physx driver is too new, i have a 9dot version and it wanted to install a 7dot version.
The question then is, do I have to install older versions of DX and physx in order to play Two Worlds? A bit of a bummer since I'm playing Star Craft 2 and was hoping this could be a nice breather...
Thanks for the help.

Installing DirectX9: it's a side by side install, meaning you won't be replacing your current DX11 version for DX9, instead you'll have them both installed and games that require DX9 files to work will will use DX9 files as required.
As for the PhysX, try this
-uninstall Physx from your PC.
-Install TW and the Physx version that comes with it.
-install the current version of PhysX.

Yes, that. Please mark Namur's post as a solution so people know that this has been solved.

Does Windows XP support side-by-side install of DLLs?

The side by side install is for for Win7, which comes with DX11 and no DX9.

To clarify grviper's answer, Windows XP does not support DX10 or DX11, the highest you can have is DX9. So, while Windows XP does not support side-by-side installs of DirectX, it doesn't matter because you'll just use DX9 for everything. And yes, this means that certain newer games require Vista or Win 7 because they require DX10 (for example, Just Cause 2 or Metro 2033).

If you run Vista or Windows 7, then you can use DX10 or DX11, and you can also install DX9 alongside to play older games.

okay, so as i am struggling with this same issue, does anyone know where to grab a DX 9 version?

Download and install the DirectX End-User Runtimes (June 2010). This will install all the necessary files.

Thank you :)

It still doesn't work for me. *sighs*

Try reinstalling the game after you've installed the DirectX runtime package. Also make sure you are running all the installers as administrator.