Turns out my wii was displaying correctly. Just needed to set my Sony TV to stretch it to 16:9 (I guess Sony assumes that anything coming into the composite slots is 4:3 by default). If you have Zelda there is a display check screen with some boxes - you are supposed to make sure they are square to ensure you have the aspect ratio right.
Wii doesreport to TV that signal is 4:3 in 16:9 mode (at least in my case) using both composite and component cables in both 480i and 480p modes. I checked some games (like Madden) actually recognize settings on the Wii and adjusts their settings accordingly but Wii still doesn't tell a TV proper ratio. I know for sure setting proper ratio on TV can be reported properly since my DVD player does it. But for now I'm stuck with this button on remote every time I change video input to Wii. I guess it's a Wii bug and I hope it can be fixed in next firmware. Some games like Trauma: SO and WarioWare seem to run in 4:3 since they look streched on the wide screen. I found it annoyning that there is no indication of screen ratio on the game box or in the manual either (similar to DVD). I haven't found reliable way to tell if game supports widescreen yet.
