Hi jimmy123j,
I had the same issue with the dotted rectangle when the item is focused. @LarsJ provided a solution that worked fine for me and it seems to solve your problem too.
1) Running your original script, the focused item is surrounded with the dotted rectangle :
2) With the additional line of code (placed immediately after the listview creation), the dotted rectangle has gone :
$Window2_List = GUICtrlCreateListView("Item 1|Item 2|Item 3|Item 4|Item 5", 0, 0, 400, 200, $LVS_REPORT + $LVS_SINGLESEL, $LVS_EX_FULLROWSELECT + $WS_EX_CLIENTEDGE)
_GUICtrlListView_SetCallBackMask($Window2_List, 4) ; "disable state information about focused item" (LarsJ) . Can be useful (keep that line)