Dempster had a ligament replaced in his elbow in August, so he is unlikely to be in play this season unless a series of cascading unspeakable events occur. I'm not familiar enough with the current protocol for rehab on this type of surgery to make a definitive statement, but I believe it's possible he could be throwing in game situations in August or September. Of course, if he is, it's more likely to be in Iowa than Chicago (barring, again, the cascade of unspeakables).
This deal is very much like the contract Jon Lieber signed with the Yankees last year (right down to the deal being struck the January after an August elbow surgery), only for considerably less money. He'll get $300K this year, and another $200K if he's activated (which is unlikely), then an option for $2M next year with a buyout at $200K (Lieber's deal was for $3.5M over two years, with the opportunity to earn up to $16.75M over three years). The Cubs have essentially bought the right to conduct and evaluate his progress through rehab and claim him for 2005 if they like what they see.
The deal only guarantees him $500K, so it seems like a reasonable risk to take, especially with a pitcher who once showed so much promise. One could argue that, injury or not, Dempster hasn't been worth much since his very solid 2000 season, but he'll be 28 in 2005, still young enough to have some things to figure out, and if the Cubs need someone to work into the fifth spot in the rotation or flip to fill another need, he could turn out to be a fine candidate for either purpose. If not, all you did was spend some money, and not much of it at that. Nice move.