Let's try again, with EASY steps.
1) Uninstall GTA3, copy your savegames somewhere save then delete the GTAIII directory
2) Reinstall from the original disc 1
3) Insert disc 2
4) select all files in the "audio" subdirectory on disc 2 and copy them to the SAME subdirectory under the installation directory, e.g. "C:\Program Files\Rockstar Games\GTAIII\audio". This is very important, stop renaming directories, you need both the files that were already in that directory and all the files in the same directory on disc 2. Understood ? If everything goes right, you'll now have about 662 Mb of files in the "C:\Program Files\Rockstar Games\GTAIII\audio" directory on your hard disk.
5) Apply the official 1.1 patch, this will fix some bugs and now you only need a backup cd in the drive.
6) Now first try and see if the game runs ok, you can apply the nocd later.
7) (optional) copy the
nocd for v1.1 over to "C:\Program Files\Rockstar Games\GTAIII\" to play without a cd.
Follow ALL of these steps to the letter and all should be ok. If you have any problem, tell me what you did with each step. DO NOT just skip steps. AND USE the ORIGINALS.