Omg. After all this time of having Kotor 2 I've finally figured out why my game lagged whenever I was near smoke or anything like that. Disable Vertex Buffer Objects=1 didn't really change anything. If any of you are having trouble with lag, go to the swkotor2.ini file and under Display Options, there are two things you need to do:
Disable Movies=1
Disable Intro Movies=1
This has solved all lag in my game. I can finally record my walkthrough of the game in HQ and I'm on a Mac (Extra bonus right???)
Anyways, you can still do the vertex buffer thingy, but these movies seem to be what caused all lag in my game.
Help: http://forums.obsidian.net/topic/29373-game-performance-changes/?p=266373&do=findComment&comment=266373