I've often thought about this, and it's not an easy decision.
Well, disc three is out of the running straight away, for a number of reasons. I think the Northern Crater is a really poor final dungeon, particularly the first few screens where there's lots of jumping and frustratingly slow climbing. For what it's worth, I think VIII has the best final dungeon of the games I've played. The final quartet of boss fights is pretty underwhelming: the only thing to fear from Jenova Synthesis is Ultima, and she can be beaten pretty easily before she gets the chance to use it; the first version of Sephiroth has that strange multi-party arrangement, but every time I've played it, I've just stuck to one party throughout, as they can then be given all the best equipment and materia; the second version of Sephiroth is no trouble at all if you can work out his attack pattern (also, Supernova is so, so boring to watch, and it's ludicrous that it can destroy whole planets but only do a few thousand damage to the three heroes), and the final version of Sephiroth is, well, impossible to lose against. The ending video is good, but it took me a couple of views to understand, so it could be clearer. Oh, and the world map music changes from perfection to something pretty unpleasant.
So, it's between the first two discs. I love how long disc one is, I love how you gets to visit pretty much the whole world on it, and I love what happens on it. The "chase", where Sephiroth is after one thing, Shinra is after another, you're after both of them in various ways... it's brilliant. Even the ending - the game just wouldn't be the same without it, no matter how much some people clamour for the possibility of resurrection. I also tend to enjoy the beginning of FF games the most because you pick up new items and abilities slowly, meaning they all get their chance to be tried out and evaluated, while later in the game there are plenty of abilities that never gets used. For example, a well-developed Enemy Skill materia can single-handedly negate the need for a dozen different magic materia. Why would anyone bother to learn Wall when Big Guard is available much earlier in the game? And so on.
Disc two, on the other hand, has the best storyline, in my opinion. While the Kalm flashbacks on disc one can feel boring, the Lifestream flashbacks on disc two are perfect. The part when Cloud takes off his blue helmet and the world map music starts playing is perhaps my favourite moment from any FF. The WEAPON awakening is probably the best FMV in the game, and the ensuing storyline adds yet another dimension to the three-way conflict I mentioned above. Even though I don't love Cid, it's always a nice change to be able to play without the forced main character for a while, as you do in disc two while Cloud is sick. Disc two is also when many of the sidequests/mini-games can be started, and they're great fun.
However, although the things you have to do in disc two sound great on paper, I actually find some of them to be quite dull. The huge materia quest has never captured my imagination, for example. The submarine game is too easy, guessing the code on the spaceship is too hard (but everyone cheats), the North Corel train controls don't seem to work, and at Fort Condor it's more worthwhile to face the boss than to actually try to win the mini-game. The fight against Diamond Weapon is enjoyable, but it's so frustrating having to wait for him to reach the shore. The return to Midgar should have been fantastic, but there's virtually no conversation or story until you reach Hojo, and to do that you have to go a very long way.
So I have to give it to disc one, in the end. Top-rate gameplay and good story beats top-rate story and average (for FFVII!) gameplay.
But maybe I thought so because many unexpected things happened during disc 2. Even more than in disc 1, I suppose.
