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Strange problem. Like you said, it could be a software problem. My HS500 seems to squeeze on Gamecube games appropriately, but I don't use widescreen mode much for games. You could check the Video Game Software section for games that provide anamorphic video, and rent some to make sure it's...

Is your Gamecube connected to one of the HD component inputs? Is the game set to output a widescreen 480P display, and not just a letterboxed widescreen picture?