i say record in 16:9 IF and only if your cam does true 16:9. This means that the cam must have a 16:9 chip that it records fully, as opposed to chopping off the top and bottom portions of a 4:3 image. If it doesnt do that, an anamorphic converter is always an option.
What I would do is actually make 2 cuts and 2 DVD's. For the 16:9 cut, just leave it as it is. For the 4:3 cut, crop the image at varying poits in time at varying positions to show only what is importnat. This way there is no stretching, no faking, no mattes, and no loss of resolution. It will however, take some more time....