Happend to my friend, I had to open and clean out all the bits of Sanitarium in his drive. If it doesn't sound like a normal spin up take it out of the drive. A loud whirring noise is the first sign.
It should just install but there's a few puzzles that have bugs. Download the most recent patch you can find. Maybe try compatibility mode. I had to switch my resolution to 16-bit when I played Curse of Monkey Island because the graphics went goofy.

Do I have to use the Pro version, or can it be done with Daemon Tools Lite?

Lite works fine matey, it'll solve the problem of mounting an image right away.

Sweet. So is there a way I can have all three at the ready, so when it says "Insert Disc X" I just hit a hotkey and it goes?
EDIT: Hmm, maybe I can just Alt-Tab out of there when it asks for Disc 2...

I have Blade Runner (with box) and Grim Fandango. And System Shock 2. And The Longest Journey. And Painkiller Triple Dose. And Final Fantasy VII.
:D

Daemon Tools Lite allows up to four virtual drives. For some games you can have all the discs mounted at once and it will just look at each drive until it finds a disc with the right label.
Another option is to burn a perfect copy of the disc with a program such as ImgBurn (free). Unless the game uses an advanced copy protection method a perfect copy should satisfy it. You can then use it in place of the real Disc 2. The explosion issue won't occur with a copy.

Exploding discs? That sounds like something that should be shown on Time Warp or something.

Yeah, I was surprised myself when I heard about it.
Anyway, I mounted virtual drives, and it appears that the issues with the color have not gone away (you can see for yourself if you look really closely in the picture I have attached). Also, when I tell that kid I want to play hide-and-seek, the game crashes. I already applied the patch that fixes "Chapter Two". Anyone aware of any other patches? I can't find any when I'm searching on Google...
EDIT: Forgot to mention that I tried to mount the three drives I needed like Arkose suggested, but it only let me run one at a time. Maybe there's a setting in the options that will let me raise that number to four?
Wait, just figured out the multiple drive problem.

Is it the one that fixes up "Chapter Two", or does it help it run better on more modern machines?

It was the chapter fix now i think about it. I must have used compatability mode to get it running. Does Vista not have the same thing ?
I would still try google as there may be a patch or fix out there.

Yes, I've been looking for another patch, and yes, the Windows I'm on, W7, has Compatibility Mode. It just doesn't fix the odd color problem.

Sound like your buggered for the moment unless you can persuade some clever programmer to fix the problem or try installing a 2nd O/S on your pc for older games.
The D3D windower program may help, its not fully translated yet though.
http://www.neowin.net/forum/index.php?showtopic=603613

That program confuses me to no end. Looks like it can't run it.
Maybe the problem is my OS is 64-bit? If that's it, I may need to use my family computer, which has XP in 32-bit.
You know what? I think I'll try it on that computer. It keeps crashing at the hide-and-go-seek game on mine.

The glitches have been reported on various systems 32&64 bit and different versions of windows, it really is an awkward bugger to run.
There should really be better backward compatability with windows and direct x drivers so we can play older games with less problems.
I think thats what D3D windower tries to do but unitl it's fully translated it's hard to use.

Yeah, it sucks that we can't run games like that. Gametap doesn't even support 64-bit OS owners. Anyway, I tried running it on the XP, but it could never fully rip the second disc with Daemon Tools, so I'm not sure what to do now. Guess I could try running it without ripping all the discs to the HD. After all, the discs are in prime condition, since the guy I bought it off of (came with a collection of 30 old games) didn't even open it.
EDIT: Even that doesn't seem to work out too well, as it won't install. Strange thing is, I double-clicked the Sanitarium file on the disc, and it started running! With no graphical problems, even! No music, though. :(
I'll just transfer over the install folder from my PC, and it will be installed there, too!

If we're in a contest, I have the near mint condition original box complete with manual, keyboard overlay (including punch outs so it could support either the old 101 key keyboard layout or the fucking old one with 90 odd keys and the function keys were on the side like on the amiga) and 5.25 inch floppy for Red Storm Rising. 21 years old, older than several members of this forum. Anyone think they can beat that? Game on bitches!
The best I can do is equal it, I've got the original C64 box & contents for Ultima IV, also from 1988