Let me explain for those you are wondering what we're talking about. In the picture setup menu of your DVD player, there are three picture options: 4:3 P&S, 4:3 L/B and 16:9.
The 16:9 option is for people who have widescreen TVs (or standard TVs with a 16:9 mode). With this setting, an anamorphic picture is sent to the TV unaltered.
In 4:3 L/B mode, when playing a DVD that contains video flagged as 16:9 anamorphic (which my DVD is, correctly AFAIK) then the player downsamples the picture and adds black bars top and bottom. You see the full widescreen image in a letterboxed format.
4:3 P&S mode is for those people who don't like black bars. The theory is, the video stream should contain vectors which tell the player which area of the full 16:9 image should be displayed; the image parts to the left and right of this area are not displayed and you end up with a fullscreen image. (Eugh!)
However, this theory is rarely implemented, if at all, on retail DVDs, because it's extra work to generate the P&S vectors, and because there are doubts over player compatibility. Normally if your player is set to 4:3 P&S, you get a 4:3 L/B image regardless.
On my DVD it's a different story. In 4:3 P&S mode, the player dutifully slices off the sides of the screen, and displays a sort-of fullscreen picture (there are still black bars because of the difference between 2.35:1 and 16:9). Since I never set any P&S vectors, the displayed area just constantly sits in the centre of the picture, which means that any important action near the edge of the screen is missed.
I don't think it's worth patching the current DVD; although what's being observed is unusual (and unintentional), it is really the correct behaviour. And if you have your player set to 4:3 P&S mode, then well, you deserve everything you get...
But for future releases, how do I get the behaviour observed on retail DVDs, that is, the picture is always presented as letterboxed?
There's a checkbox to create a pan&scan video stream in CCE, but I'm pretty sure I left it unchecked when I did the encoding. Maybe it has something to do with the authoring.