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Unfortunately that's just the nature of anamorphic 16:9. It squeezes the widescreen image to fit the standard 720x480 frame. Unless your TV has a 16:9 mode then it will look squashed as you note. However, if you burn your video to a properly created anamorphic DVD, then the DVD player itself will provide the widescreen letterbox with black bars above and below.
But aside from that.... maybe its time to get that plasma screen you're been thinking about ;-)
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