I tried running it and when I get to the Friendly Arms the game quits on me.

All goes well at CandleKeep. Is there anything I should know about it?

The main reason is probably because you didn't do a Full Install of BG1. Try doing a full install of everything. Obviously, you can't be changing CD's for BG1 when you're actually playing BG2. It won't work, you need a full install.