After spending a week on the demo level and having a few people playtest it. I've come to the conclusion that it's too confusing for the player whether they've played episode One or not.
The people that haven't played the game, and played the demo are confused with the changing areas (I wanted to play it out almost like a dream sequence crossed with a movie teaser). They're expecting the game to be the same and feel unsure about it.
The people that have played the game are confused because they're expecting something to happen at certain points, but something else happens instead. So it's hard to get into the mood of the game because they're constantly being yanked from all sides.
So, I'm dropping the special demo level and shall just offer the first few sections of episode one instead. This way no-one shall be confused, and people know precisely what to expect when they buy the game. :)
I am glad I gave it a go though, seemed like a great idea in my mind.
For those waiting for the demo before deciding to buy the game, it shouldn't be too far away now!