Well even though a 64Mb graphics card may not be very good for TODAY'S systems, remember that you are running a 13-year-old game, where as low as 4Mb is perfectly acceptable!

No, you don't need the CDs in your disc drive AT ALL when using a Daemon Tools install/mounting method - you need to mount the CD image(s) still - but no actual CDs. See my tutorial here:
http://digitality.comyr.com/flyboy/lb2/inst_lb2_image.html

There are many advantages in using the CD image mounting method, as you can see in the above guide. It should also totally eliminate any future CD read errors such as the one you describe - as there's no interaction between the game (software) and PC (hardware) - something that is a problem with today's systems and old games/old CD writing methods - it's all virtual! Much faster and more reliable.