"Disable Vertex Buffer" setting did not work for me.
I was able to dig up a permanet solution for most ATI cards, thou.
Download the version 4.11 Cats, you can get them here.
Then extract them but dont let it install, go to the drivers folder and look for the atioglxx.dl_ file.
Then open a dos window and extract that file with this command.
expand atioglxx.dl_ atioglxx.dll
Then place the atioglxx.dll in your KotOR 2 main directory (this works with KotOR as well).
This way you retain your most up to date drivers for all your other games but use the best functioning ATI driver for KotOR 2.
Not my orginal solution, passing it along I tested it and works smooth as silk.
I was droping to single digits frame rate, now when you get off the ship at Dantooine im at 60 fps, SWEET!