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It's not supposed to fill up the whole screen. The true, non-stretched resolution is what you see with the black borders. You can press the right-analog stick if you want to display it at the screwed-up resolution. Technical explaination ripped from a post elsewhere:
"The Genesis ran at a resolution of 320x224. It got stretched to fill a normal (non-HD obviously) television screen with a resolution of 640x480. This required screwing up the aspect ratio a bit, etc. Basically, the picture was stretched and therefore not absolutely pure. Though you'd have a really hard time noticing that anything was wrong, as you can see from the stretch feature in this game.
Anyway... the Xbox is capable of displaying 640x480 (and in fact much higher if you have an HDTV), and therefore doubling the resolution of the Genesis picture to get a display is the easiest way of getting video. That would mean 640x448 is being displayed instead of 640x480, hence borders. You could then stretch it, and get your full screen view.
Sega, being the good people that they are, decided to leave both ways of viewing the game in. If you're concerned about seeing the most pure picture possible, then by all means stick with the borders. If you really can't notice the difference, click the stick and you'll end up with full screen just as you remember it."
Alyas  "Good... Bad... I'm the guy with the gun."
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