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Start by changing the resolution on the project so its different to the PC and see if that stops the distortion.
That sounds like a limitation of the video card, within display settings you should be able to click on display 2 (projector) and have a completely different resolution to display 1.
If windows isnt having it, unplug the PC monitor and see what resolutions the project is prepared to operate at when its the only display, then introduce the PC monitor and alter the PC monitor so you can get both showing at once.
Are you looking to use the project as a mirror rather than extension, as this may be another reason why you having issues.
1024 x 768 is the supported resolution of the projector, what happens when you set the monitor without the projector connected to 1024 x 768
So with no monitor connected the screen is still squashed when the res is 1024x768?
Its strange, as its sounds like its working in Anamorphic/letter box mode, but it doesnt act like that when no PC screen is plugged in.
On the project remote press the 16:9 button and see if that gets you back to a 4x3 image with the pc monitor on.
In that case the next thing to try is a different computer such as a laptop to see if you get the same fault, which points to the projector, however I believe the issue is actually a hardware fault on the graphics card of the computer, in which case the fault wont occur when using a laptop.
This does point to a hardware fault, within the main PCB which houses the signal processor within the project, as clearly this isnt input issue.
Its worth doing a Reset All, on the menu, however I wouldnt expect this to resolve the issue since anamorphic has already been disabled in the menu, and no other settings should cause this fault.
If the projector is still under warranty you can get a replacement, however this is showing as a older model so probably out of support, the cost of repair (a new PCB) would be uneconomical in my view, leaving with you with the only option of replacement.