Quick reply
Okay, Pinnacle Studio is being thick and seeing your 16:9 as 4:3, so its squishing up all the pixels creating a distorted picture. If you're playing this back on a widescreen TV, you can get around this by simply switching the TV mode to "stretch". But this isn't exactly perfect.
You can change the aspect ratio in TMPGenc. In order to minimise the amount of times you encode (successive encodes to MPEG reduces quality), I suggest you do this once you've outputted your final video.
So first of download and install TMPGenc.
http://www.tmpgenc.net/e_main.html
Once installed, open up and start a new project. (I'm assuming your from North America as your original video was encoded to NTSC)
Check the options as outlined and click next. Click browse next to the video Video File box and select your video (the audio will be auto selected):
Change the aspect ratio as below and leave the other settings as they are:
Click next, then click Other Settings. In the Advance tab, change the video arrange method to Full Screen Keep Aspect Ratio as below:
LEave everything else unchanged and click OK. Click next and then next again. Finally click OK. This will then create a video (mp2) file and audio (wav) that will be DVD compatible files for use in your DVD authoring program. If you run into trouble, we can change a few settings to create a system file with Video and Audio combined. Click OK to start encoding!
You will now have video with the correct aspect ratio. However (there's always a but

), this will be in 4:3 and not anamorphic widescreen, so you will have to use the zoom on your TV.
An alternative would be to encode as above, but use NTSC [16:9] in the first step. This will flag your video up as 16:9 and "may" play as anamorphic widescreen on your DVD player even if it looks squished on a PC.
Hope this helps