Some Help for the Intel Users
Discovered this one on accident.
I have an old intel graphics card. Now, when most people have problems, the most common solution seems to be "Make sure your graphics driver is updated." However, that's EXACTLY what caused my game crashes after the character creation screen.
I noticed that after a fresh install of Vista, Kotor II miraculously worked, (albeit I had heavy lag from anything with smoke.) However, after I ran windows update, suddenly the game started crashing and I couldn't load my saves. However, the smoke around the main menu (around Darth Sleeps-With-Vibroblades) screen was very significantly less laggy.
I then proceeded to system restore, unrolling the last update. After doing so, it worked. I assumed something in the windows update caused it. And I also assumed the decrease in smoke lag was caused by the graphics driver update that was ticked with the other windows update.
So I thought "Hey, I'll install the graphics driver, but not all the other crap that probably screwed it up." So there I updated my intel graphics driver, and suddenly it stopped working again.
So in many of our cases, it could be that people's advice is what's crashing our games to begin with. Try giving downgrading your graphics driver a try, if you've tried everything else.
Edit: If anyone knows a fix for the smoke lag, it would be much appreciated.. Or maybe a mod that gets rid of smoke altogether? I have heavy ebon hawk lag too, even when there isnt smoke in there.