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Sounds suspiciously like the graphics chip in your DC is going out or has been damaged somehow.
Does this happen only after it's been playing for some time? The Dreamcast has a big metal plate that touches two chips on the mainboard, one of which I believe is the CPU and the other most likely the video chip. The plate is a heat-sink to draw away the heat from the chips. Unfortunately, the fan in the Dreamcast isn't sufficient to draw enough air across the heatsink, and sometimes the heatsink may not even touch the chips firmly enough for it to do any good. If you're not into tearing apart your Dreamcast (I've done it, but I wouldn't recommend it unless you're very mechanically and electronicly inclined), I'd suggest doing what I've done to prevent Dreamcast lockups (due to overheating):
Turn the Dreamcast over on its side (the fan port should be UP), and place a small desk fan next to the Dreamcast, where it blows on the bottom of the console. This has kept down the internal heat on my Dreamcast enough so I can continue to play, even though my machine tends to overheat and lock up. Maybe it will keep down the graphics problems you're talking about too.
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