I have no such problems launching KGFF from KT. Here is what KT does:
1. extracts the resource to KT's working directory
2. it executes "GFFEditor.exe" located in the same directory as Kotor Tool and passes the name of the resource it just extracted to that program.
There is nothing more magical than that. (I mean, you could copy notepad.exe to GFFEditor.exe and you'd open the file in notepad.)
My KT directory is C:\program files\fred tetra\kotor tool
You might want to double-check your paths.
The work around of course is to simply extract the file and launch KGFF on your own.