When I swap discs with the emulator (FFVIII), it always complains that it's the wrong disc, however if I restart and load the save file (the one that's made at disc change) the game loads just fine.
Give it a shot.
what you are seeing is what is most likely one of the bugs in 1.7.0, this particular one can happen when you attempt to change discs when going from one image to another. you can either get through the disc swap on a previous version of epsxe and once you are through you can go back to 1.7.0, or you can play directly from the game disc rather than playing from an image.
btw i addressed this issue in the troubleshooting FAQ awhile ago so always check there first because you will usually find what you need in it.