I just tried PowerDVD V4 in Win95B and it plays DVDs okay. On my PC, it doesn't seem to make use of hardware acceleration in Win95, but I think that's a driver issue. Anyway it's not blocky red and blue.
Maybe it's a driver issue in your case.

Apart from that, if it worked fine in WinME, but you wanted better DOS support, why not use Win98SE instead? It's got real mode DOS mode, and was more advanced than Win95.

Hmm, it could be a driver issue. Finding Windows 95 drivers for my Radeon DDR was difficult. Most of the Win 9x drivers I found would only work on 98/ME. Now that I've found a valid Win95 driver, my OGL and DX games are working, but maybe the DVD/video part of the driver needs 98 to work properly?

I lost my 98SE CD so all I have are 95 and ME. I tried ME first, forgetting that they took out DOS mode, so here I am downgraded to 95. I know I could just buy a pack of CDs and burn a copy of 98, but all of my DOS and Windows games are installed. I don't want to start all over again with a different OS. 😀

It IS the driver! I put in TNT2 M64 and DVDs look normal now. But I will be putting the Radeon DDR back in because it is a much faster card. 3D performance is more important than DVDs. 😀

PowerDVD which version? I'd try older ones in Win 95 anyway for a test with latest video drivers anyway but the Radeon DDR looks like a very late card I'd use on something newer both hw and sw.