First of all, this is kind of a last ditch effort. Im very close to giving up on this buggy piece of trash. Lets start at the beginning.
I downloaded the game from GOG.com. Two Worlds Epic Edition. Installed, and found out that I had a newer version of Physx. I then proceeded to play. The game worked great up until the first village. I noticed that lipsyncing was broken. I consulted the thread on these very forums, and applied the older file. Then I started having crashes. Lots of random crashes. Sometimes in conversations, sometimes in combat, sometimes when I just look at a plant funny. Sometimes I go for an hour of play, but most of the time its every 3-10 minutes. However, at some point, there WILL be a crash to desktop. Its simply going to happen.
I uninstalled the game, deleted my physx version, and installed the version that comes with the game. Booting up, I left the lipsyncing be, and tried again. Same issue. I applied the latest physx drivers over the previous ones. I updated DirectX. (Wouldn't let me, I have latest version.) and updated my sound drivers. (see previous.) I then set the game to compatibility mode, and tried XP and Vista modes. I have it set to run as administrator. I also have UAC off, and my kepersky internet security turned off. I tried the dual core thing, to no effect. I also tried lowering the settings.
So for the last four hours I have been working on getting this game to work. I just can't do it. Ive checked both these, and the official Two Worlds forums, as well as the steam forums. I cannot find a solution, the game WILL NOT STOP CRASHING. Thats bold so you can understand my frustration. Simply put, short of me opening code, I cannot fathom what could POSSIBLY be wrong with this POS software. Ive posted my specs below, fresh off the diag log.
Its really frustrating because I was really enjoying the game, the creating your own items, and spells, and the combat, and every part about it really. I KNEW I should have purchased Raptor 2010 instead. :(
Anyway, any help would be greatly appreciated, but I'm not holding my breath.
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Operating System: Windows 7 Home Premium 64-bit (6.1, Build 7600) (7600.win7_gdr.100226-1909)
Language: English (Regional Setting: English)
System Manufacturer: ASUSTek Computer Inc.
System Model: G60JX
BIOS: BIOS Date: 02/05/10 19:13:52 Ver: 08.00.10
Processor: Intel(R) Core(TM) i5 CPU M 430 @ 2.27GHz (4 CPUs), ~2.3GHz
Memory: 4096MB RAM
Available OS Memory: 3958MB RAM
Page File: 1330MB used, 6581MB available
Windows Dir: C:\Windows
DirectX Version: DirectX 11
DX Setup Parameters: Not found
User DPI Setting: Using System DPI
System DPI Setting: 96 DPI (100 percent)
DWM DPI Scaling: Disabled
DxDiag Version: 6.01.7600.16385 64bit Unicode

You have been misinformed; the install location is never the problem. Unless there is something inherently wrong on your end (outdated drivers, required software such as PhysX being faulty or missing, etc.) GOG releases work just fine right out of the box (so to speak) with everything at default, and in the few fringe cases where something doesn't work the Compatibility tab is the only thing you need to get any GOG release working properly.

Those suggesting installing a game outside Program Files recommend running it as an administrator as well, but this is the wrong way of going about it; running a program as an administrator from within Program Files achieves the same result. It is the administrative elevation--not the install location--that was the solution. The same applies to suggestions of disabling UAC to fix a particular game; running that game as an administrator achieves the same result without the significant downsides that come with disabling UAC.

Anyway, I hope that helps make things a bit clearer.

Thanks for clarifying... I've always installed my games outside of Program Files anyway so I didn't know firsthand what effect it has. By the way, does the difference between "Program Files (x86)" and "Program Files" matter? If the user is running Win 7 64-bit, but the game is installing to "Program Files (x86)" (which I understand is for the 32-bit programs), will there be problems? Or is it the PROGRAM rather than the version of Windows that matters (i.e. if Two Worlds doesn't support 64-bit then it would need to go into the x86 folder)?

It doesn't matter as such, but for a variety of reasons it's generally best to let programs install in the one they specify. Programs and games that have both 32- and 64-bit executables in the same package install in the x86 location (e.g. Crysis), while those that have separate versions will install in the directory for the version you're using.