What resolution was the game meant to be played in?
What do you guys find works best?

Really, whatever works best for your eyes and your screen. I think I run at around 1280 x 960 or 800(?).

Note, too, that you can increase your character's sight range as you level up so you might find your character seeing beyond the resolution you've set. The disadvantage to this is that your mini-map will show an area as explored though you haven't actually seen what's there. The cure? Either crank up your resolution a notch, or don't put so many skill points into vision enhancements.

I'm playing it on 1680x1050 on my main computer and on 1280x1024 on my other computer without problems.

1280x1024 seems to be the best for me . . . any higher and the characters are too small. On wide screen I'm running 1280x800

Edit: I believe the original max game res was 800 x 600.

I've got a widescreen and play at 1280 x 800. My screen goes up a lot higher, but I don't like to play at too high a resolution or it becomes harder to select things and read text. It looks very nice at 1280 x 800 IMO.

Widescreen at 1280 x 800 for me too.
Anything bigger and I get eyestrain trying to read text and things get harder to select with the mouse. As Blarg said, the graphics look really good at this res. Still looks sharp even though my native res is 1920 x 1200.