I have played this previously on PSX and Saturn and I do not remember it looking this way. Sure it was always very pixely but this seems new to this release. What is going on?

Saturn version for comparison:

https://www.youtube.com/watch?v=hnX1AI0Ggnk

Those versions had multiple discs, PC only had 1 disc from what I remember

Seemed to be pretty common for DOS fmv games for one reason or another, phantasmagoria 2 comes to mind of doing the same thing, it doesn't bother me much.

It's a damn shame that Night Dive couldn't have lifted higher quality videos and assets to put them into this version of D - but who knows where they would have found those kinds of things.

I believe it's because the resolution is 640x480, where the console versions ran at ~320x240. I assume that the developers went with inserting a black line every other other line as it was less taxing on the systems of the time than line doubling.

Another FMV game I own, Psychic Detective, actually has a hidden config file switch to enable line doubling rather than interlacing. Why the hell they didn't mention that in the manual or readme file is beyond me.

As for D, its puzzling that they used the higher resolution. The PC version's video files are a pitiful 192x144 resolution, there's virtually no GUI to take advantage of it, and they could have got away with using the same low res assets as the console version with no interlacing.