KOTOR II doesn't need a huge amount of memory (you have enough really, just make sure your swap file is a good size, at least twice the size of your system RAM), and as far as driver settings go, just make sure that the AA and Filtering are set to application mode so the game sets them not the drivers.
One thing I note however, is that the latest drivers from nVidia do seem to slow down both KOTOR and KOTOR II. I never had slow down issues before installing the 71.89 drivers, especially on Dantooine in the first game (which for me is even worse than in the second game).
Oh and one last thing...defrag the drive you have the game installed on. I'm always installing and deleting stuff on mine, and after defrag the drive things started to fly again real quick...