So I've got KotOR installed on my laptop for some good RPG shenanigans (after replaying Mass Effect 1/2). Ran into some issues I'd just like to take a few minutes to go through.
First off, when installing the game you should browse to the setup executable and set its compatibility mode to Windows XP SP2 and run it as an administrator (right-click, Properties, Compatibility). Once it's installed, update immediately to version 1.03 using the "swupdate.exe" update tool in the installation directory (usually "C:\Program Files\LucasArts\SWKotOR").
Now you should disable "Read-Only" on the entire "LucasArts" folder by right-clicking it and selecting Properties. Un-check the "Read-Only" box and then make sure that the "apply to sub-folders and such" box is also un-checked. Apply the changes. Now go and set "launcher.exe", "swconfig.exe", and "swkotor.exe" to XP SP2 compatibility mode as described above.
If running a multi-core system you need to force the game to only run on one core. To do this; launch the game, Alt+Tab your way out, press Ctrl+Alt+Esc to open the Task Manager, find "swkotor.exe" under the Processes tab, right-click it and select "Set Affinity". Un-check everything except "Core 0". You will need to do this every time you start the game, unless you use a third party program such as Prifinitty to automatically set it as soon as the game is launched.
There is also a replacement "Mss32.dll" file for KotOR 1 and 2, the same replacement file works for both games from my understanding. Just Google "Mss32.dll KotOR" and I'm sure you'll find yourself a good download link.
If you're running a widescreen monitor you'll want to checkout WSGF and UniWS. As a note, I had to copy my "swkotor.exe" to my Desktop to patch it with UniWS. If I didn't do this UniWS spat out a bunch of errors and did nothing. I suspect this has something to do with the security permissions that Windows 7 places around files in "C:\Program Files". UniWS will patch the retail 1.03 executable as well as the No-CD 1.03 executable for those of you not wanting to destroy your disks. It won't work on earlier versions.
You may also want to download the latest DirectX Redist package so you get a full installation of DirectX 9.0. KotOR likes this and I find it helps to stabilize the game for long periods.
With all that down you should be good to go. However I highly recommend hitting that F4 Quick Save key often when playing on Windows 7, really sucks to have to replay hours worth of RPG most of the time!
If anyone has any questions or extra information to add here, go for it.