Hi, I have found a solution to this problem.
Simply disable hardware acceleration. If you don't know how to do this, click this link:
Turn Off Hardware Acceleration to Improve Video Quality
Now you can use whatever graphical options you like! Set the colors to 32-bit, start the game and enjoy. There will be no lag, and as far as I can tell, no image quality loss.
Just remember to re-enable hardware acceleration afterwards.
This was tested using Windows XP with all the latest updates, nvidia drivers 162.18 and 163.69, with Icewind Dale 2 in 1024x768 32-bit mode, both windowed and fullscreen, using an XFX 8800GTS 320MB Extreme Edition.