I had the same problem, it's not really a windows or driver issue, it's just an old game. There is a fix though, I got it from the steam forums (DF 2: Jedi Knight and Mysteries of the Sith ULTIMATE FIX THREAD - Steam Users' Forums
I used it and works great now, applicable to both mysteries of the sith and Dark forces 2.
1. Right click your game in the Steam Games list, click properties, then click "set launch options." In there, you put -windowgui and -displayconfig with a space separating the two!
2. Now you're ready to launch. It will go ingame, probably in a small window. Go ingame, go to setup on the bottom right, in setup, click Display, you should see "Advanced Options" or "Advanced something" at the bottom. Click it. Don't touch ANYTHING except what's on the left. You want to set the game to render using "RenderBot" or "RenderDroid", which is under the top selection under display "SW: Non-3D] DIBsection windowed display." Click OK, then choose a resolution.
Don't try to fill the entire screen. I'm sorry, if you're using a widescreen monitor, you still have to play in a square window. I have a 1680x1050 monitor and i run the game at 1280x1024, and i just auto-hide the taskbar so I can see my health and ammo HUD.
DO NOT CHECK ENABLE 3D ACCELERATION. If it's checked, un-check it. Also, Drag "View Size" to one little click under the max. If it's all the way to the right you wont be able to see your HUD. Lastly, and you might have to do this every time you launch the game, I know I do, UN CHECK "Backbuffer in System Memory."
You're set! Play the game in a window. It should look and run just fine. The only thing you'll have to do from here on out is make sure that "Backbuffer in system memory" is un-checked or else you'll get weird colors and artifacts that drag across the screen during gameplay.
This should make it run perfectly, hope it helps.