I've just taken a screen capture and looked at the way the invalid 16BPP cursor is rendered...
I see two valid pixels, followed by 2 transparent pixels (in my screen capture), repeating over the entire width of the sprite.
Since a byte contains 4 8-bit pixels and every 2 of those 8-bit pixels form a displayed pixel(2x8 bits are combined by the DAC to 16BPP)... So every byte produces 4x8BPP or 2x16BPP pixels, which matches the interval seen in the sprites output. So, somehow each other byte from VRAM is fully transparent(containing 0xAA), with only half of the actual sprite displayed somehow?
Edit: I also noticed that although the window width is correct (it's setup to 64 pixels), Windows does program the row offset to double that of what it's supposed to be(128 pixel lines), while rendering the pixel bytes at even addresses only (odd addresses are always 0xAA)?
Adding a slight skip odd bytes to the CRTC Sprite handling causes the Windows 98 cursor to be displayed correctly.
Edit: This is what happens with My Computer on Windows 98 now:
The attachment 1468-My Computer on Windows 98.png is no longer available
It looks like it's rendering something at every other row, while somehow rendering part garbage somehow?
Edit: Running Disney Villain's Revenge on the Windows 98 insta
The attachment 1469-Bottom icon showing some correct text after running Disney Villains Revenge.png is no longer available
llation, running it's configuration from the CD-ROM's setup.exe, somehow causes the bottom icon to start displaying part of it's text?
The attachment 1469-Bottom icon showing some correct text after running Disney Villains Revenge.png is no longer available