CD-audio (either as part of the disc image or as separate mp3 files) is not supported in dingux picodrive (IIRC, it's still in the code, but the option cannot be enabled) as the a320's CPU is too slow to handle it. Lunar likely doesn't work because it makes heavy use of CD audio (for both the video segments and almost all BGM), while Lunar 2 has no problems because it uses no CD audio (all digital audio is compressed into data).
Like Herc said, look for games that have little or no CD audio tracks for best compatibility. Here's a list of games you might want to avoid: http://segaxtreme.net/community/topic/4518-sega-cd-audio-track-list/
, I say might since just because it has a lot of CD audio doesn't necessarily mean it won't work at all, apparently Sonic CD plays pretty good, only lacking most of the BGM.
GBC,GBA,GBA SP,NDS,NGPC,Panasonic FZ-10 3DO,NES,Sega Nomad,Sega CDX w/Power Base Converter,PS1,PS2,PS3,Saturn,Dreamcast,PC (Win 98, XP, 7),Dingoo A320,Dingoo A330,Gemei A330,LetCool N350JP,PAP-GAMETA,GCW-Zero SE,Kyocera Rise,2DS,GP2X-F100,GPD G7,JXD 100,JXD A1000,JXD A3300,JXD F3000,JXD V5000,JXD S7300B,Hyperkin SupaBoy
Currently playing: Theatrhythm Final Fantasy Curtain Call (2DS)