I think Howard is right. Because I have a arcade monitor in a cocktail cabinet, manipulating the actual monitor would be a big pain in the rear. Although it would be interesting to see if daphne accepts this method being that it is so picky.
Howard, I think you are right on the money with regards to the utility you proposed. In fact, for the last year I have been doing it the poor man's way. I create a separate user profile for Daphne with a black background, eliminate as much of the window border as I can through display settings. (I can't seem eliminate all of it) and run it in window mode. Of course I have to center the window manually and hide the mouse arrow in the cornor so it isn't ideal.
Understandably, you have a lot on your plate and true fan's of laser disk video games probably have horizontal monitors so the utility is probably in low demand. However, if you get around to it some day please let me know what kind of busy work I can do on it as I'm not a programmer.
In the meantime, I have had some success with a video editor called "premiere Pro" by adobe. When rotating and resizing the m2v files it saves the black border as part of the video file and therefore daphne doesn't feel the need to stretch. Currently, I'm dealing with some FPS issues in the conversion from AVI back to M2V. Although, as you stated, this method isn't a great solution, due to the fact that it won't work with any daphne game with an overlay, I'm sort of having fun with it so I'll keep this thread updated with the progress. Although I do look forward to that utility someday

Thank you for your help.