I backed up my copy of SW: KOTOR II to my HD (straight from the original DVD) and noticed that whenever a character gets involved in a conversation with someone, the game skips straight through the dialog to the part where you choose what you want to do.
ive played with it a bit now, and its basically skipping the movies that contain the dialog between characters, and dumps you off where it leaves you with a decision to make. theres no sounds made from the conversation, just skips straight to the decision making part of the conversation with the character.
playing straight from the original DVD there is no problem. conversations happen normally.
i tried the droid problem .ini update and that didnt help.