I've done more research, testing, and troubleshooting. Here is what I've discovered for GTA III in Windows XP, and the final setup I've landed on:
1. The game (even in pure vanilla form) directly changes your Windows speaker setup. If the GTA III speaker setting is "2 Speakers", then it changes the Windows Speaker Setup to "Desktop Stereo Speakers". If the GTA III speaker setting is "More than 2 Speakers", then it changes the Windows Speaker Setup to "Quadraphonic Speakers". As far as I can tell, there is no way around this. I never noticed because until now I always played on a 2 speaker setup.
2. The most recent Silentpatch works perfectly in Windows XP. As far as I can tell, the DDraw.dll companion mod is not needed in Windows XP, and creates issues with the sound/speakers.
3. Using the Wayback Machine, I was able to find a 2017 version of ThirteenAG's GTA III WidescreenFix that works on Windows XP. However, installing it in its standard format (d3d8.dll in root game directory, the rest of the files in a scripts folder) is what what causes the sound engine to default back to Miles 2d from EAX3. So I removed the dll and placed the rest of the files in the root game directory. Now the EAX3 setting sticks! But read #5 for an unintended consequence.
4. I downloaded another mod which skips the intro movies. And since I don't have to manually toggle the EAX3 setting anymore, I modified my .bat file to automatically change the Wndows Speaker Setup back to 5.1 only 3 seconds after launching the game.
5. Because I "hacked" the widescreenfix, if I try to quit the game normally (even with alt-f4), I get an unhandled exception error that is difficult to clear out because the game UI still controls the screen, and alt-tab doesn't work unless I CTRL-ALT-DELETE first. It also gums up the Windows Event Log. So I build a shortcut that kills the GTA3.exe process (not app) when I use the hotkey Ctrl-Alt-K. When I do that, the game ends peacefully.
6. While most of the mods say to stay on gta3.exe v1.0, I was not able to start the game without mounting the audio cd, even when silentpatch claims that it removes the cd requirement. As a result, I just installed patch 1.1, which removes DRM (legitimately...it was made by Rockstar), and allows playing without a cd in the drive, as long as I copy all the game audio to the audio folder in the game directory.
That's about it. I'm happy to answer any questions from other people who want to optimize GTA III in Windows XP.
I'm now in the process of optimizing GTA:VC. My first hurdle is that no version of Silentpatch after Build 8 seems to work in Windows XP...