Ok, so I've got some new info. I installed the game on an older XP system (SP2) with an AGP video card. I changed the install path to c:/games and altered the registry. The game starts and plays perfectly with no cd's.
I reinstalled the game on my newer XP system (SP3) with a newer GT 8800 (PCI Express) video card. I changed the install path to C:/games and altered the registry. This time the game started with no problem without the CD in the drive but locked up within 5 minutes (when I opened the gate).
So in conclusion it looks like it's a probable hardware conflict. Amerzone does not like newer XP systems? I'm also thinking it might be an audio issue because on the older XP system the clock by the old man ticked normally. On the newer XP system, the clock seemed to double tick. Just a guess though.
Anyway, I'm going to install the game on my 1 year old Win7 machine tonight. But my hopes are not high

Thanks again for all the help. I'll update soon.