The various sources and aspect ratios can cause confusion and problems, if the setup is not correct.
Check out this article from Microsoft on how to get the proper aspect ratio to display properly on your WMC monitor.
Essentially the issue starts because old non-HD standard definition video (480i, 4:3) recorded using S-video or composite video has an aspect ratio of 4:3. Displays full-screen on a 4:3 screen (or in a 4:3 window on a Windows desktop monitor), like an old fashioned 4:3 CRT or "kitchen TV".
In contrast, HDTV screens are 16:9, and the program content itself is also 16:9. When the 16:9 content is displayed on a 16:9 screen (or 16:9 window on a Windows desktop monitor) again the entire full-screen 16:9 real estate is used to display the image.
No problem for either of the above situations.
The problems arise when you try to display 16:9 content on a 4:3 screen, or 4:3 content on a 16:9 screen. If you want to "retain OAR (original aspect ratio)" and not have any horizontal squooshing or stretching (so that humans look human) then something's got to give.
There has to be a compromise somewhere, and that means either:
(a) losing some of the left and right portion of a 16:9 image when displayed on a 4:3 screen, by "crop". The remaining 4:3 "center-cut" portion of the image can now be displayed full-screen on a 4:3 screen.
(b) keep the full horizontal width of an original 16:9 image and display it in the full width of the 4:3 screen, but as "letterboxed" so that there are black bars on top and bottom of the image. This uses the full width of the 4:3 screen and retains the OAR of the original 16:9 image, but effectively "zooms" that 16:9 image (i.e. moves you visually back further away from it, so that it becomes small enough to be placed into that 4:3 screen width). This "letterbox" approach to 16:9 content (e.g. HDTV channels) viewed on 4:3 screens (e.g. SD television screens) is preferred by most who just prefer OAR to anything else, no matter what the screen size.
(c) keep the full vertical height of an original 4:3 image (i.e. recorded from 480i SD channels via S-video or composite, or from a 480i digital channel) and display it using the full height of a 16:9 screen, but as "pillarboxed" so that there are black bars on left and right of the image. This uses the full height of the 16:9 screen and retains the OAR of the original 4:3 image. Again, this OAR presentation is generally preferred, even though there are black bars on left and right.
Now the video setup settings on Windows Media Center extenders (e.g. on my Linksys DMA2100) allow you to specify how you want output to appear on the related display device. I have my DMA2100 set to deliver 16:9 content as "4:3 letterboxed" when sending out over coax (to my 4:3 SD kitchen TV) because I want OAR under all circumstances.
Native 4:3 SD channel recordings are delivered by the extender "4:3 full-screen" because the source content matches the display device, so no adjustments are made by the DMA2100 for this situation.
With Windows Media Center you also have the ability to configure the "zoom" setting when watching TV on your computer monitor, as the referenced article alludes to. This alters the presentation on your Windows monitor (either full-screen or windowed mode). And I have WMC configured to display 4:3 zoomed correctly for OAR (with black bars on left and right) to my 16:9 window on my 16:9 computer monitor window, for watching 4:3 content on my computer's 16:9 monitor window.
You can experiment for yourself and see the options, and decide how you want to view things on your WMC window.
My guess is that you'll want 4:3 OAR for 4:3 recordings made via your composite input on your TV card, and if your window is 16:9 then that will mean 4:3 full-height but with black bars on left and right... just like you'd want on your real HDTV when watching 4:3 content on a 16:9 screen through your xBox Windows Media Center extender, for OAR.