[r0lZ]

OK, it's a 4:3 movie, without black borders. So you MUST select the 4:3 option in Domain Streams Attributes and TURN OFF the source picture letterboxed option. (Have a look at the Domain Stream Attributes of the menu. It is OK, and you should probably use the same settings for the movie.)

If VLC insists to display it incorrectly, just use a good media player. I have always encountered a lot of big bugs with VLC. It's an excellent player to play standalone video files and for the streaming, but it is extremely bad to play DVDs. The extremely large window displayed above is an evidence of the bad quality of VLC: that aspect ratio doesn't exist in the DVD specs, and should therefore never be used when a DVD is played.

Do NOT use VLC to test if your DVD edits are correct, as it will probably lead you in the wrong direction.