So, I recently bought the complete Ultima collection from GOG, probably my favorite purchase so far.

So far, running the Ultima games in their native aspect on my 1366x768 screen (resulting in black bars on the sides, but no stretching) was just a matter of changing some settings in the dosbox conf files, an easy task.

Ultima 7, however, will only run as a small box in the middle of the screen, or stretched to fit my screen width, which makes the mouse behave a bit uncomfortable. I went through pretty much any configuration option, with my biggest success being a slightly larger box in the middle of the screen by setting the scaler to 3x.

Does anyone know if there is a way to fix this? I tried searching the internet for a solution, as well as these forums, but so far no luck.

Download Exult and use that to run the game. It's a really good fan-made engine to run Ultima VII (and part 2).

From memory it supports all kinds of resolutions.

Exult has some crippling bugs in it still unfortunately (such as the disappearing items issue), so you might be fixing one issue but introducing others.

to the OP, I'm running U7 right now using the hq3x scaler and just accepting the black bars on either side of the screen (or running it in windowed mode if I want to look at the maps or docs as well). My screens are all 1024x768 I believe.

It might have less issues on a 1024 screen, considering it has the same aspect ratio as the original. I don't mind black bars, but playing on a screen the size of a postcard isn't really ideal :P
I might try hooking up an older monitor I have lying around. If I recall correctly, it also has a 1024x768 resolution.

Don't get me wrong, I love the Exult project. I used it when I fired up U7 a few years ago (though I didn't get far), and I didn't hit that bug. I just don't like when people put it out as an alternative, but don't disclose that it still has some issues. Not that the original doesn't!

The keyring mod alone probably makes Exult worth it, but again, I just think people need to be aware of the issues.

Actually, the Exult team believes they've fixed the disappearing items bug that everyone's so terrified of. If you scroll to the bottom of this post, they're asking people to test it to be sure it's gone.

That's great news!

Concerning the op's problem the solution is setting the window resolution to your native one and to select a graphic mode other than "surface" using the "Graphic Mode Setup" from GOG.com. If you can not tell your graphics driver to keep aspect ratio you'll have to set that using gog's setup tool, too.

More information on dosbox wiki: "Scale the application to this size IF the output device supports hardware scaling (i.e. any output other than surface). Original is the game's default or chosen (through setup.exe or in-game menu) resolution. If original resolution is less than desktop resolution, DOSBox will switch the screen resolution to the closest match requested by the game or application. For example, if a game in DOSBox is requesting a graphics screen resolution of (320 x 240) while your desktop is (1920 x 1200), DosBox will switch to (320x240) or the next highest resolution supported by your GPU drivers, e.g. (800 x 600) if the former is not available. Many games will be below the minimum resolution supported by modern video cards, so DosBox will scale the game up to at least that minimum."

I've found hq2x or hq3x as the scaler and ddraw as the output works best in windowed mode, but I've got a slightly larger monitor. (hq2x might give better results even though 3x should theoretically fit.)

In fullscreen mode I get headaches with scalers that smooth the edges because of the interpolation and the resulting blurriness... a list of scalers and what they do can be found on the dosbox wiki as well.

Changing the output to ddraw did indeed fix it. It was pretty much the only thing I hadn't tried yet. Thank you, good sir.