I think you will find that the resolution you have set for the desktop isn't matching the resolution set in Daphne. Works great for me but I'm using an ATI Radeon 9000 card and everything is perfect.
There is a drop down option on the settings that relates to the desktop settings. Try 800x600 first. What res have you captured your mpeg from laserdisc/DVD?
Also play around with other desktop settings, then copy the startup string to your front end or batch file. I used to have black bars on the screen to be able to see the overlay, but when I upgraded the card this seemed to go away.
Which version of Daphne are you running? Which OS?
Try going to
www.daphne-emu.com if the above suggestions doesn't work.
Let us know of your findings.