Hmm... Strange. Sounds like you did everything right... I don't have a CD32, so I can't test this, but I have a couple thoughts...
1) It might be a bad crack, or a mislabelled demo CD. The CDs from Back 2 Roots are all legal, but often cracked, because those are the only versions available anymore. (unprotected originals lost)
2) Maybe an NTSC/PAL thing? Try booting your CD32 in the other mode, and see what happens.
3) I imagine you've already done this, but..... try the other joystick port? ;-)
