Not sure what advice you've had so far, but I have been in this situation as well, and this is what I do:
Adjust the monitor settings. My monitor has buttons on the side in which I'm able to set Widescreen/Zoom/1:1. I'm able to run SHIII at its native resolution and have it fill the screen. With one of the options it just adds black borders to the sides to fill in the space, keeping the aspect ratio correct. With the other option it runs at exactly 1024x768 (my native is 1680x1050), and there are black borders on all sides. Putting it to widescreen gets the effect you see now, squished/mangled/distorted shapes. So this is one fix I've used. I use the zoom and just deal with the black borders left and right of the playing screen.
It's hackish and I guess cheesy (and probably won't help), but if your monitor doesn't have video scaling options (above), you could play windowed and ... maybe ... make a nice (related or relevant) background to flush out all that desktop space around the play window? Tuck away the task bar with auto hide, and make sure your desktop icons aren't around the edges. Could be a solution to playing windowed and lessening the immersion decay.
Just an idea, in case the first one is not an option for you.
Sorry for the frustration, I feel you there. I refuse to man the light AA guns on uboats in SHIII and IV because the aiming reticle looks skewed IMO. Maybe that's accurate and how they were for those AA guns, but it drives me crazy that they are oval shaped instead of round like on the american subs in IV and the heavy AA guns in IV/III, lol...
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