What is your emulation setup. Right now I use

Emulator: epsxe
bios: scph1001.bin
GPU: petes open gl2 v2.8
full screen mode, 1280*1024
internal x and y res set to psx resolution. (increasing these settings reduces pixelation but creates distortion)
stretching and render mode set to 0
No texture filtering
high res textures - none
use pixel shader for psx texture window emulation enabled
Default sound plug in