Funny, I could swear I saw a full-speed PSX emulator somewhere...
... oh no wait, I was just dreaming.
Heheh just kidding. I kinda remember what you're talking about, but I think it was only a tech demo and not fully playable. Maybe if you search the archives a bit you might find it. Sorry I can't help ya better than that, but at least you're not the only one who remembers this eh?