Possibly Petes CD plugin 1.4 and Windows ME? Just a guess as I have Win 98 First Edition. Maybe you could try switching to another CD plugin and see if it helps. Null2's SPU could also be a problem, try another SPU and see if it works better. Best of luck.
I just changed back to Win98 SE cause win_me gave me a lot of problems, It could be this. Win_me made fatal errors with epsxe. Are you using pete's opengl? Cause all my problem started when I got the upgrade of Glsetup.