Glad you bought KOTOR2 on the Steam Sale. You wont regret it. Since there still seems to be some confusion about where to install it, here a quick explenation.
When asked for the location, DO NOT use the default already set. That's for the disk version. For Steam it's either;
C:\Program Files\Steam\steamapps\common\Knights of the Old Republic II\
C:\Program Files(x86)\Steam\steamapps\common\Knights of the Old Republic II\
A custom set Steam location (for example I use D:\Steam\)
Depending where you installed Steam (so check where it is in your folders!).
If you have crashes at the Obsidian logo, try going windowed. In the swkotor2.ini change BOTH fullscreen=1 to fullscreen=0, and under [Graphics Options] add AllowWindowedMode=1.
That's the most common crash issue for Steam.
Also people noticed that DisableVertexBufferObjects=1 can have spaces in it by default on a Steam installation. Remove those spaces so it looks above to make Smoke effects less frame-rate dropping.
If anything else, drop by one of the many threads in the Steam forum, ask there, or ask here.
Have fun, and enjoy Knights of the Old Republic II!