This is indeed the case. In long 3D conversations, ePSXe would sometimes just stop. I could press ESC to get out, but that was all I could do.
As for SPUs... Eternal 1.1 is by far the best SPU available right now, IMHO. It doesn't give a performance hit at all on my GeForce2MX/Cele500MHz/128 MB RAM PC, and the sound is fantastic. The only problems are that the text lag is still there (though much less so) and the SPU stutters when picking up items/changing weapons.