Is it correct to think that the DC hangs those black sidebars over the 720×480 rendered graphics and then sends all of that to the TV as 720x480p without changing the pixel aspect ratio, and then the 3:4 TV squishes it, black bars and all, and that is the first time the pixel aspect ratio gets affected?
You are correct except that it renders at 640×480 and pads it to 720×480 with black bars.
With my possible setup below and reading about the OSSC, I see to set 480p line x2 to off for basic 480p passthrough, does using the DTV-480p setting or using the dvi-d-to-hdmi cable somehow cause the output to change to 480i?
( DC <> VGA cable <> OSSC <> dvid-to-hdmi cable <<still 480p here?>> TV )
The OSSC will only output 480i on 480i passthrough mode. The DTV-480p setting is just for sampling the correct amount of horizontal pixels.
I know that these should all boot into VGA, but do I have to worry about PAL format with Shenmue 2 conflicting with the the DV standard that I need to set for widescreen?
What do you mean with the DV standard that you need to set for widescreen? You just need to set your tv to 16:9 with a widescreen game.