This is happening to me too. I have updated graphics drivers, reinstalled KOTOR II, repatched and it still occurs. Even going back to a previous save game doesn't help.
Oh and no there is no Microsoft pop-up.
Gonna try updating to patch 1.0a
Got it working - here is what I did. Reinstalled the game and patched to 1.0a manually. Booted the game and began from a save prior to entering the acadamy.
Hope it helps!