I managed to fix it by changing the "keep aspect ratio" into true in the config file, but now there are two black bars to the left and right of the game window.
From what I recall, the first Lands of Lore is a 4:3 game, so it will not fit properly in a widescreen monitor. You could potentially stretch it to 16:9 (no black bars on the sides), but that would distort the image. Are you looking for a distorted image or a correct one?
I switched it back so it scaled to a normal window with two black bars to either side. I am assuming their is no way to get widescreen without stretching the image. I tried setting the resolution to original, and it stretched across my widescreen.
One last minor issue, I am getting a lot of sound stuttering between videos, and load screens. It doesn't persist in-game. I tried switching the game to midi (which actually improved the sound quality) for everything except digital samples, where there was no midi option. The problem is still persisting. It is a minor issue, but still annoying.