jsidhu762: It's kind of a pain that you don't get to carry your items over, but it makes sense if you think about it. Most prisons in the west don't carry firearms (there's a few that have pepper guns, tasers, or other non-lethal weapons). This is because if a prisoner manages to grab a gun, the result would be catastrophic. It's the same kind of logic. Keep in mind the "inmates" of the dungeon aren't common street thugs. Like the residents of Arkham Asylum they have supernatural abilities, and a few might have martial training.
If Irenicus kept your gear lying around, there's always the chance you'll escape. And if you escape, you'll be well equipped to fight the hazards scattered throughout the dungeon - as well as Irenicus himself. The items you get in BG1 don't scale well with BG2 IMO. It won't be long until you find better gear.
I don't really see this being likely flavor reasoning.
Irenicus is (rightfully!) unconcerned about what you might be able to do. He's been throwing around 9th spells before you ever met him, and likely before you were level 1. Iirc, pre-BG2 he
captured your party in its entirety before any of you could so much as get a good look at him (when killing tends to be easier); later, you know what you are up against, and he still does it again. Exit the intro dungeon, and he stands off multiple cowled wizards. He's probably about as concerned about your party being a threat as I would feel threatened by a couple of fire ants; they might sting a little, but an out and out fight would be no contest.
I hadn't really considered it before, but my guess is your stuff simply became bribes, payments, and armament for Irenicus' allies and minions. Does "Hey, go do this task for me and I'll give you a shiny trinket" sound familiar? ;)