KOTOR 2 STARTUP ISSUES/CRASHING....NEED HELP!!!

Ok here's the deal. Ive never had any problems with this game. Bought it for PC back in Feb. of this year and played it with no problems. Got alittle busy with my life and it collected dust till now. Went toplay it again and no problems still. Then I closed it and went to try to play it the next day and I get the infamous "Microsoft Need To Close" error. Here's the things I've done so far to try to correct my problem:
-update my video and operating system drivers
-update Kotor 2
-deleting and reinstalling (4 x's)
-3 days of online researching thru official websites, blogs and forums for help.
-bypassed the launcher and tried to start game str8 from the .exe file.
-turned off all spyware eliminators,firewall and antivirus as well as any other background program running.

I just cant seem to get past that damn error. Now everytime I uninstall and reinstall the game it allows me to play right after that but if I close the game and replay it then I get the error message. This has become very frustrating for me because Im a huge KOTOR fan. Hope anyone can help me with my problem. Here are my specs:

GRAPHICS SOFTWARE:
Driver Packaging Version 8.383-070613a-048640C-ATI
Catalyst® Version 07.6
Provider ATI Technologies Inc.
2D Driver Version 6.14.10.6698
2D Driver File Path System/ControlSet001/Services/ati2mtag/Device0
Direct3D Version 6.14.10.0503
OpenGL Version 6.14.10.6479
Catalyst® Control Center Version 2007.0613.1506.25058

GRAPHICS HARDWARE:
Graphics Card Manufacturer Powered by ATI
Graphics Chipset Radeon X1300/X1550 Series
Device ID 7187
Vendor 1002

Subsystem ID 1996
Subsystem Vendor ID 1545

Bus Type PCI Express
Current Bus Setting PCI Express x16

BIOS Version 009.012.016.002
BIOS Part Number 133-A67631B7-106
BIOS Date 2006/10/12

Memory Size 512 MB
Memory Type DDR2

Core Clock in MHz 601 MHz
Memory Clock in MHz 270 MHz

Primary Display Yes

SYSTEM INFORMATION:
OS Name Microsoft Windows XP Home Edition
Version 5.1.2600 Service Pack 2 Build 2600
OS Manufacturer Microsoft Corporation
System Manufacturer GATEWA
System Model W3502
System Type X86-based PC
Processor x86 Family 15 Model 6 Stepping 4 GenuineIntel ~3200 Mhz
BIOS Version/Date Intel Corp. GC11010M.15A.0009.2006.0420.1045, 4/20/2006
SMBIOS Version 2.4
Total Physical Memory 1,024.00 MB
Available Physical Memory 217.23 MB
Total Virtual Memory 2.00 GB
Available Virtual Memory 1.96 GB
Page File Space 1.43 GB

HELP!!!!!!!