I have same issue, or maybe very similar. I have patched the game to the 1.6.5 patch for the Atari published game. The game starts, and I talk to the first guy who gives me the task of going to kill the dragon.
I enter room with dragon and graphics get screwed up, I get flashing white large blocks about 4" in size all over screen although I can still see the game map, they are flashing very fast. This eventually stops and I enter battle with the dragon, everything is fine at this point, but about half way through battle, the grid pattern on the floor starts flashing, but game continues on. Then shortly after the game causes a hard lock where I have to press the power button on my computer to power down since the three finger salute won't get me to task manager, nothing will, Kings Bounty has hard locked my computer once again.
We have totally different computers fisklisa, I have Vista 64 bit and you have XP 32bit I gather from seeing your dxdiag file. The only thing similar is that we both have Nvidia 8800 cards, except you have the GT and I have the GTS.
My dxdiag.txt will be attached in case (heaven forbid) someone from 1c support were to actually read these forums and know the answer.
If I bypass the opening tests and go straight into the map (at least with the demo) I have not gotten locked up yet, I just bought the full version of the game yesterday, so I'll have to try that with the full version to see if it's the same as it was with the demo, however in the demo I didn't have those flashing white blocks on my screen and neither did I have the floor grid flashing either in any battles I participated in, so maybe the patch is the cause of that.
My Dxdiag.zip is real zip file since silly forums only allow 19.2kb max size text files, silly forum, 19.2kb is for kids
