I was a little puzzled by this problem, too.
Fortunately, I have been an electronics/computing enthusiast since a small boy, and it has become my profession, too, so I got to the bottom of this one.
I created a PAL DVD in 16:9 format from 16:9 photographs using two computers in parallel running Window Live Movie Maker to create slideshow videos which I then merged into a single DVD using Windows DVD Maker under Windows 7. To get maximum clarity, I saved
these as WMV video files with an aspect ratio of 1280:720, which is exactly 16:9. This made it easy to see what was wrong.
Of the two computers which created the video files files, one was running Windows Live Movie Maker version 2012 (Build 16.4.3505.0912) under Windows 8.1, and the other was running an older version, version 2011 (Build 15.4.3538.0513) under Windows 7.
Both of the video files appeared to have the same settings, and display correctly under Windows Media Player and the popular VLC video player.
In Windows DVD Maker under Windows 7, the file from the Windows 8 machine showed as being narrower than the file from the Windows 7 machine, and the rendered DVD had the same issue: the file from the Windows 8 machine was squashed horizontally to fit into
a 4:3 ratio.
I found that the open-source video analysis program "gspot" was able to diagnose the problem for me. The video codec used by both versions of Windows Live Maker appears to be the same... WMV3 WMP v9 (VC-1 Simple/Main),
and the dimensions are both 1280x720 - but there is a difference, which appears to make the difference to Windows DVD Maker. There are parameters called sar, par and dar, which are Storage aspect ratio, Pixel aspect ratio, and Display aspect ratio. See
http://en.wikipedia.org/wiki/Pixel_aspect_ratio for an explanation. The video that works correctly only has sar=16:9 defined; the one that fails, from the newer version of Windows Movie Maker, sets sar=16:9, par=1:1, dar=16:9. Note that ALL these are correct,
and the problem is just that Windows DVD Maker under Windows 7 misinterprets the fuller set of aspect ratio parameters, and needs fixing by Microsoft developers. The exact mistake is hard to guess, but the meaning of these parameters is well-understood and
the developers at Microsoft who have access to both programs should be able to make Windows DVD Maker understand the output from the newer Windows Live Movie Maker, and other programs which use all these parameters.
You can work around the problem using various third-party tools which let you edit these parameters, to
remove the par and dar values, and then your videos should work correctly in Windows DVD Maker.
I am rather hoping that, with this information, someone at Microsoft can find and fix the bug. For now, we will have to edit our videos before using them in Windows DVD Maker, or just use the older (2011) version of Windows Live Movie Maker to get videos
that work properly.
As a footnote: a Windows 8.1 version of Windows DVD Maker would be good, too, now that the problem that has been making it less than ideal is clear. Having to run it only under Windows 7 is a real nuisance, as I only have a relatively slow laptop with Windows
7.