I have had Baldur's Gate 1 +2, Icewind dale 1+2, and planescape torment sitting around my house for a while now, uncompleted. I recently found this site and it motived me to play them all. After finish Baldur's Gate 1 2 times (I didn't like 2 as much...) I came to try this. Here is how my first battle went.
Goblin-Attack Paladin
Goblin-Attack Mage
Mage did 2 damage to goblin
Paladin-critical miss
goblin did 6 damage to paladin
goblin did 8 damage to mage
mage-death
goblin did 8 damage to paladin
paladin-death
Looks like this is a challenge.

Icewind dale 1 is in my opinion harder than bg1 and bg 2. I've never completed the game due to frustration and because the 2nd i think was better. I will say this though, mages are very fragile in this game. In 2, you get the feat expertise which helps but in 1 mages get eaten for lunch if not watched carefully.

Keep the mage in the back shooting at things, the paladin in the front with the other warriors fighting, the rogue always on the move to backstab/sneak attack/run away, and the cleric healing people if you have one. Your better off sticking with a bard though, they suck in iwd 2, but in 1 they rock.

You can change the difficulty. At normal difficulty short swords and short bows do 1-6 damage. 8 damage look like insane difficulty or even HoF mode.
The fact that you don't have 4 other party members attacking might be an additional reason why you're in trouble.

Yeah, it appears you're playing with a two character party. Is that the case? If so, grab another couple characters. If not, get those other buggers into the battle!

A lot of this game depends on your character builds and strategy though. Make sure you have a good understanding of the spells and take some time to make sure you get decent rolls for your character's main attributes. (That's not to say you have to totally munchkinize, but you should make sure you've got good scores in the main attributes).

Use the pause button a lot and issue commands so you're certain your characters are doing exactly what you want. And set the option to pause when an enemy is sighted. That will save you a lot of frustration (and death) since it prevents you from waltzing into a whole horde of mobs and getting overwhelmed.

The first thing that came to mind when I encountered the first real battle in IW was that this is like the Gold Box games. It's all about the battles and you have to play it like a tactical wargame.

It's about holding the line while your artillery kill and your special units support the frontline and hinder the enemy.

Fighters, paladins and rangers as front. Clerics and druids as close support and mages as artillery.

Of course you can play the game in a lot of other ways but it's designed to play like that and imho it is also the most logical way.

Edit:

Coelocanth gave some tips on pause options and that is very important so I'll give you some tips too.

If you want to play it in a sorta turnbased way have it pause at the sight of a enemy and when a round is finished.
I prefer to have it pause at the sight of a enemy, spell cast, target gone and party member injured.
At the sight of a enemy lets me gather my party while the enemy advances toward me and have my spellcasters start to bombard the enemy spellcasters (A very good strategy is to have your spellcasters and ranged members take down enemy spellcasters first and then concentrate on melee enemies.). Then when a enemy go down it pause so I can direct my members to a new target.
When a spell is cast it lets me choose a new spell and target for my spellcasters and support casters. Cleric have noone to heal let them melee until they need to heal and then draw them back a bit to avoid interrupts and then cast.

Of course I pause when I'm about to get flanked and other situations too. Anyway I like these settings. Gets me enough control without too much micromanagement.

After a couple of battles I got the hang of it and I have made it to the tombs without much trouble. I have this party:
Human Paladin
Human Illusionist
Halfling thief
Half elf Cleric/Ranger
Human Bard
Dwarf Fighter
Should I stick with my paladin or make a fighter/druid?

You can stick with your paladin. High level druidic spellcasting offers additional powerful options, but you can do wthout.
I'd replace the thief instead, multiclass fighter/thief is far superior to singleclass (more than twice as much damage per round and more hitpoints) and will still have maxed out thieving skills early in the game.

I disagree with that on the rogue. Although the fighter/thief can fight longer, the thief can 1 shot and disable people in combat much better than the multiclass can. They get more sneak attack potential and more crippling strike which really pays off and is very useful. Although the fighter/thief can do more damage overall, all the thief needs is one or two good sneak attacks on different enemies to be very useful. And to make things better, after you sneak attack someone they usually run after you, giving your mages more time to snipe them or your archers as well.

I disagree. It's nice that the "fighter/thief can fight longer", but the main benefit of multiclassing with fighter is the far better offense, both in normal and sneaky combat.

Take a look at the game mechanics. The fighter/thief improves thac0 faster, which is important for hitting enemies, gains +1 to hit, +2 to damage and an extra half attack for weapon specialistion and extra half attacks at fighter level 7 and 13. Even if you only look at sneak attacks the multiclass is superior, the increased chance to hit and bonus damage wven out the slightly lower thief level.
Just compare those builds at different XP values.
Example at 1,000,000 XP: thief 14 vs fighter10/thief12
Both have more than enough skill points, both get the same 3E sneak damage bonus, but the multiclass has a 20 percent higher chance to hit, does 2 extra damage which each hit, and attacks twice instead of only once per round.

Wait....the general max level in this game is 14???

I thought you could get to like 25-30. If thats true than you are probably right. Either way i still prefer my thief. I dont like the too munchkinized characters. I played the fighter/thief when i soloed bg2 and it was too easy.

You can get to level 30, but you need to play through HoW and TotL as well, at the very least.

I think pure thieves are generally a waste of time in IWD. Fighter/thief is much more valuable, and I have a fighter/thief/mage who is also very useful. Traps/locks are the only really useful thief skills. Once I get those to 100%, I dump the rest in stealth.

Well I made a new party once I realized I made some critical answers. I also took your recommendations and here is my new party:
Human-Paladin
Dwarf-Fighter
Half-Elf - Bard
Halfling-Fighter/Thief
Human-Mage(general)
Half-Elf - Ranger/Cleric
I got much better roles this time too.
Btw Should I turn on 3E sneak attack? List the pros/cons please.

Backstab has the potential to do more damage (except at very high levels, I believe), but must be performed when the character is stealthed or invisible. Sneak Attacks don't have to be performed from stealth, only from a flanking position. I tend to prefer sneak attacks.