>>1380Strange, it works for me and I have the Steam copy too. I'd check over it carefully to make sure you're doing everything correctly (for instance, it notes the Graphic and Display options are inverted.)
If all else fails, you can try Flawless Widescreen, though I've never had it work and I'm uncertain as to whether or not it supports KotOR 2.
http://www.flawlesswidescreen.org/