This error message seems to come up every now and then, so I thought I'd post a topic explaining what it means and how to fix it.
The wording of the error message implies incorrectly that the required version of DirectX is not installed on the computer. This is not the problem, however. Inquisit will run all the way down to DirectX 2. Given that Windows XP shipped with DirectX 7, the version of DirectX on your computer is almost certainly just fine.
The most likely problem is that the drivers for your computer are out of date, or you are using the generic Windows graphics driver rather than the driver made specifically for your graphics card. To fix the issue, visit the manufacturer's web site for your graphics card, and download and install the latest drivers for the card. The error message should then go away.
-Sean