Everytime I ran into a BIG problem, reinstalling the CFW and reformatting the ms has always done the trick. Many months ago I had a big freezing problem and ended up reinstalling 3.71m33 twice to get rid of it.(I think a did it wrong or got some bad files) Now I use Pandora and never seem to have a problem with the firmware anymore, and I've reinstalled about 9 times.
With that being said I have also had bad experiences with FF7, in fact the same problem that you have. (The different color matrix glitch). I found that some firmwares have a problem, so don't. I found that 3.71m33-3 plays my FF7 flawlessly (Discs 1-3 - NO problems, not once!!

) . If you don't want to switch back to 3.71m33, I think you can use a older version of popstation (3.00 -3.70, I think) on 3.90 to help with this problem. Don't quote me on this, I just think I remember reading this somewhere! Hope this helps.