Oh wow, what a mess. Sorry to see that, that's a new one on me. Here's what is going on (although I'm not positive why):
- The lobby is a "GDI+" window, which is rendered using standard windows drawing methods, while the starfield in the background is full Direct3D so that it can be animated, etc.
- The Direct3D render targets the main game window, which actually has a different window handle from the lobby window panel, and is just supposed to render itself at 20fps to that overall window.
- The lobby itself is rendered only on update, again using the standard windows apis of GDI+. What you're seeing is this not actually updating properly, and/or the Direct3D components bleeding through over top of the GDI components.
- Also, it looks like the GDI components are smearing in general, with the tooltips and such leaving permanent markings -- this is characteristic of a GDI window that is not redrawing when it should be, and tends to happen with an application that is hung. I'm sure you've probably seen this at some point in windows in general.
So, what's the solution? On this I am not entirely sure, it could be a few things, but I'm not certain what is causing this. It could be some sort of problem with GDI+, in which case that might either be an issue with the underlying components, or with the .NET 3.5 wrappers of them. If you are on vanilla Windows XP (no service packs, or just SP1), or on Windows 2000 (which I am not even sure AI War works with), then that might be your problem right there. Windows XP SP2 added some fixes to some various windows glitches that could result in GDI errors of this sort, so that could be the issue.
It might be that you are on vanilla .NET 3.5 instead of .NET 3.5 SP1 -- the game installer will install 3.5 SP1, but if you already had 3.5 and canceled out of the 3.5 SP1 install, then you'd still be on vanilla 3.5. This strikes me as the least likely problem.
The other thing that seems likely is that this might be some sort of strange graphics driver bug. Graphics drivers have different components and modes for DirectX and GDI, and so perhaps the driver that you have is simply messed up for GDI. If that's the case, simply updating your driver should hopefully fix it. If you are already up to date on your graphics card driver, and are using nvidia drivers in the 19x range, you might actually consider trying a downgrade to the 18x series instead; there are a number of issues for some specific hardware devices with the 19x line. I'm able to run it fine with AI War, and many other people are also able to, but some folks have trouble with the 19x drivers in a wide variety of games.
Hope that helps!