How about the state of the game at the moment? Is it playable? I'm interested to buy this after spending hours on the original.

From what I've tinkered around with, it is.
I have a major gripe with it ATM, namely you can't scrap ships. The button doesn't do a damn thing, which is really a bummer when it comes to getting rid of obsolete designs.

Maybe someone else can fill you in in more detail regarding combat?

Yeah, i'm interested to know about the combat too. If the bug not so severe i might get it soon. How about the HDD requirement? The old one only take about 600MB, surprisingly small considering you can do lot in-game minus story / cutscene.

p/s: i'm still learning the game (SOTS 1), never though turn-based strategy game could be this addictive.

Another question, is this game require Steam to play?

I don't have the game.

People were complaining about the Steam requirement, so I assume it is required.

People also complained that tactical combat was especially broken, with ships not firing or reacting properly.

Two good sources of information are the Paradox forum and the Kerberos forum. If you skim the top active threads and new release notes, you'll get an idea of the overall state of the game from week to week.

http://www.kerberos-productions.com/forums/viewforum.php?f=37
http://forum.paradoxplaza.com/forum/forumdisplay.php?488-Sword-of-the-Stars-II

Only if you buy it from Steam. If you get it from another service (GamersGate, Impulse etc. ), you don't need Steam at all.

From reading around the Paradox forums, it uses Steam for updates, but actually doesn't need it to be loaded to play.

Except by all accounts, it's unplayable without the updates, so Steam is required in the broadest sense.