I'll also add my own installation bug to this thread. While installing the game from CD, I received the following error while installing files from the 3rd CD -
Component: DefaultComponent
File: E:\data4.cab
Error: Data error (cyclic redundancy check)
As this is clearly a defective CD, the fault lies with the CD Factory, not with Obsidian.
FIX:
1. Copy the files from CD's 2,3 and 4 into separate folders on your harddisk (eg. C:\KOTOR2_CD2, C:\KOTOR2_CD3, C:\KOTOR2_CD4.
2. When prompted by the installation program, give the directory in which the files are stored (eg. C:\KOTOR2_CD2).
The installation will continue as normal.
PS Thanks to Thummin for the actual solution. You saved me three hours of head-banging frustration.