Did you try Win 95 and the 98/ME compatibility mode, to see if the one you didn't try first would avoid the lags?
Did you try temporarily disabling your second screen, to see if that would make a difference?
Try the 4GB Patch
to increase the amount of virtual memory that the game (or any 32 bit application) can access in 64 bit versions of Windows, to see if that helps with performance.
The download version of the game doesn't have this issue, so that may be an option (currently 90% off on Steam), especially if you would like the higher resolution and widescreen aspect ratio support.