I played Eye of Beholder back then and to my surprise you cant use mouse to anything in PoR. I did ready their weapons/armor/shields and they dont show during combat, looking like my characters are fighting with their fists. Why is this happening?

The combat icons do not change depending on what weapons you have equipped. The combat icon has no effect on combat, it is cosmetic only. To change your characters' combat icons, you need to do it outside of combat. Choose Encamp then Alter then Icon (while the character whose icon you want to change is selected).