lpDrawItem->rcItem.right - lpDrawItem->rcItem.left,
lpDrawItem->rcItem.bottom - lpDrawItem->rcItem.top,
the fourth parameter is bigger than image width so it draws beyond image area. This is visible when LiveCD is lauched on EGA graphics because window color goes transparent, but bitmap doesn't.
But it would draw fine if there was pState->ImageInfo.cxSource instead, or minimum of it and (lpDrawItem->rcItem.right - lpDrawItem->rcItem.left).