I just fought the demons for the first time, last night.
Here's how it works. When you dig past the magma (not just a couple of spaces, you have to go deeper; you can excavate along the far bank of the lava river safely, I think, if you want the obsidian), you'll run into a pit, which is a red # sign. There are lots of these, arranged so that you can't dig to the adamantine without hitting one, but the demons only get triggered once.
Demons are & symbols, and there are three kinds. Frog demons (which are water and fire immune), tentacle demons (fire immune), and spirits of fire (fire immune, breathe fire). Spirits of fire are, in my opinion, the most dangerous by far, due to the firebreath.
What I did was save, copy my save, marshal my entire population into my army (equipped with decent weapons, masterpiece obsidian swords mostly), and send them into my Hall of Doom, which led down to the furthest-south point of the map. From there, I bridged the lava and sent a single miner to dig into the far side. I hit a pit and the demons spawned; they killed my legendary miner in a few swings, and went towards my Hall. I triggered a flood trap, but the demons destroyed my exit floodgate before the water could emerge, so I failed to slay any of them with that. They then proceeded to charge up the Hall into my men.
I lost half my fort's population (down to 52 from ~100), but I killed them all. If my flood trap had worked, it would have been much easier, since the spirits of fire would have been dead, and they were the ones who caused the most casualties. I'll do it right next time.
Also, conventional traps (stonefall, weapon, cage, etc) don't have any effect whatsoever. The demons simply don't trigger them, else dealing with them would be really, really easy. (I don't care how tough a critter is, a trap can be made that can kill it easily. Six masterpiece obsidian swords, some bronze spears, and a couple of masterpiece large bronze disks, anyone?). You need to use "clever" traps; floods, drawbridges to splat them, etc.
Update:
Water doesn't hurt spirits of fire. Damn. Frog demons are WEAK, my squad of five fairly-well-trained swordsmen made short work of two or three of them, and tentacle demons drown, but fire spirits, arrrgh, they are hard to kill. And they're highly lethal.
[ November 13, 2006: Message edited by: Kylaer ]