It's a strange problem, Derek, but it appears to be an issue with Chrome.
I can duplicate your problem, but only with Chrome and only with the embed on your web page. There is no problem if you click the full screen button. It also works just fine in Internet Explorer in all display modes, with either Silverlight or JavaScript. It also works with no problem in Safari. Whatever is going on here, it's specific to Chrome.
Another strange data point is that your image displays just fine in Chrome on the zoom.it website, which is using the same embed:
http://zoom.it/mqSy
So, my best guess is that a recent Chrome update has caused a regression. Presumably it previously worked in Chrome. It works fine with the other major browsers. So, this should be pursued with Google to figure out what they changed that caused this regression.
Since it does work in full-screen mode and on the zoom.it site, its possible you could find an interim work-around. One hypothesis is that is that there is some CSS or other attribute on your page that might be inadvertently tweaking Chrome in some way that is causing this incorrect rendering behavior with the zoom.it embed.
Have there been other recent changes to this page on your site? Is it possible for you to construct a new, clean-and-simple page that only includes the embed and see if that works? If so, then its a game of "process of elimination" to figure out exactly what element on your page is annoying Chrome and causing the incorrect behavior. That could serve as both a workaround for you as well as useful data for Google to debug what's going on with Chrome.
Zoom.it does not use Java in any way, so I doubt that change was a factor. You could always re-enable Java for a test, just to be sure its not effecting something in Chrome related to this rendering problem.
Hope this helped!
Bill Crow
(former) Seadragon Group Manager
Aseem Kishore, Former Employee