I made the iso and copied the files to my desktop and installed it from there, it worked, but now I cant play the game because it does not read any disks.
If you can get it installed at all, you've got a start.
All you need to do to get it to read discs properly is to edit the registry setting for the FF7 disc drive so that it knows where to call the discs or ISO from. I'm not sure exactly where it is in the registy since I've never really had to do it, but it'll be under Software> Squaresoft, Inc> Final Fantasy VII.
Just take a look round there for anything that looks like it might need a drive letter, then just change it to the one you use your discs or ISOs with.
Hope that helps, don't give up!
EDIT: Although, I'm not too sure how installing it like this is going to affect other things. You might have to take movie files from the other discs, since I'm not sure they're all stored on the first disc.