Yeah I am pretty sure the aspect ratio is preserved, but I think the software scales the image (makes it larger) so it uses your whole screen.
Again I believe most DVDs are currently a maximum of 720x480 resolution. If that is the case, then a movie displaying on a native 1680x1050 display *should* appear as a smaller rectangular image at the center of the screen with black bars on the top, bottom, and left/right sides. This isnt the case though...every software DVD player I have seen actually uses the whole horizontal screen and just puts black bars on the top and bottom.
My goal is to eliminate any sort of scaling, and achieve 1:1 pixel ratio (as this should theoretically be the best image possible).
EDIT: I think I have proven my theory. I got World of Warcraft Collectors Edition. It comes with a DVD that includes the opening cinema movie. Playing the DVD to watch the movie with nVDVD shows the movie like any other DVD movie (fills the screen except black bars at top and bottom). Then I watched the movie via the actual game itself. It displays the movie with black bars on the top/bottom AND the sides! Again, I use 1280x1024 native with centered mode turned on.
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