Ok here is the deal so far as I have found:
Without trying to sound arrogant let me say I already knew all you said about replacing the sound files in the zip. Thanks for being thorough though, I appriciate it.
SOUNDS
I tried to replace Klingon_Disruptor.mp3 with a file of my own called Klingon_Disruptor.mp3 and the sound would not play. I tried changing the sound to a .wav file and editing the Sounds.txt file to point to it and it worked. However, the .wav format is cumbersome when multiple ships are firing multiple wepaons simultaneoously, the game stutters. I have tried about 19 different .mp3 formats unsuccessfully. Only the .wav sounds will play for me. Also, It seems that not all the sounds in SFC3 are the same format to begin with. Some are 44100Khz and some appear to be 22050Khz. I have had no luck finding one .mp3 format that will work for all sounds. If you know of one please let me know! I tried making the sound length identical, in the case of the klink disruptor, it's 0.836, and no luck.
MUSIC
in addition to your "watermark" problem, there is no listing that I can see for the music files contained in the SFCMusic.zip file in the Sounds.txt file, so even if you could make them play, I'm not sure how you would make the game recognize them. It appears that the 4 tracks per race are hard coded, so the "watermark" might be as well. With any mp3 encoder you should be able to change that signiture. The problem is, if you change it or if it's not present, the game may not recognize the file.
These reasons are why I started this thread. Someone at Taldren knows what the deal is. My guess is that it's Scott Bruno since his name is on the Sounds.txt file. I'd just like to know what the deal is so I can stop wasting my time if there is no way to do it.