I assume your desktop is something bigger than 1024x768 and dosbox is set to windowresolution=1024x768. Did you try other outputs (e.g. opengl)?

ddraw is known to have issues with Windows 7. Look at DOSBox's console window to find out if ddraw even got used at all, and if what you're seeing isn't DOSBox falling back to surface output.

what is your dosbox version and where have you got it from?
what is your Operating System?
what are your PC specifications?

post content of "DOSBox Status Window" (in Windows: right click on its title bar -> edit)
enclose your dosbox's config file

Using windows 7, Dosbox 0.74, Specs: Intel i7 960 @3.72ghz, 12 gig of DDR3 RAM, GTX 295.

Content of console window:
DOSBox version 0.74
Copyright 2002-2010 DOSBox Team, published under GNU GPL.
---
CONFIG:Loading primary settings from config file C:\Users\kerleyj\AppData\Local\
DOSBox\dosbox-0.74.conf
MIDI:Opened device:win32

Config file contents:

[sdl]
fullscreen=false
fulldouble=false
fullresolution=original
windowresolution=1024x768
output=ddraw
autolock=true
sensitivity=100
waitonerror=true
priority=higher,normal
mapperfile=mapper-0.74.map
usescancodes=true

[dosbox]
language=
machine=svga_s3
captures=capture
memsize=16

[render]
frameskip=0
aspect=true
scaler=normal2x

[cpu]
core=auto
cputype=auto
cycles=fixed 4000
cycleup=100
cycledown=100

[mixer]
nosound=false
rate=44100
blocksize=1024
prebuffer=20

[midi]
mpu401=intelligent
mididevice=default
midiconfig=

[sblaster]
sbtype=sb16
sbbase=220
irq=7
dma=1
hdma=5
sbmixer=true
oplmode=auto
oplemu=default
oplrate=44100

[gus]
gus=false
gusrate=44100
gusbase=240
gusirq=5
gusdma=3
ultradir=C:\ULTRASND

[speaker]
pcspeaker=true
pcrate=44100
tandy=auto
tandyrate=44100
disney=true

[joystick]
joysticktype=auto
timed=true
autofire=false
swap34=false
buttonwrap=false

[serial]
serial1=dummy
serial2=dummy
serial3=disabled
serial4=disabled

[dos]
xms=true
ems=true
umb=true
keyboardlayout=auto

[ipx]
ipx=false

[autoexec]
mount c d:\games\dos
mount d k:\ -t cdrom

get the latest (beta) nvidia drivers

I'm having the same problem with ddraw output in DosBox 0.74, and my specs and config are almost identical to Solymr's, right down to the GTX 295, Intel i7 (975) and Windows 7 x64.

While the opengl outputs do stretch to fill the window, ddraw does not. Also worth noting that switching to a 1920x1200 fullscreen with ddraw *does* fill the screen, indicating the problem is peculiar to windowed mode.

[sdl]
fullresolution=1920x1200
windowresolution=1280x1024
output=ddraw

Installing the latest nVidia drivers (both public and beta releases) was worth a shot but it made no difference.

Opengl does fix the issue, but it will not work under any circumstances with ddraw. Using latest beta or public drivers makes no difference, pretty sure I've had this issue since I switched to Windows 7, so might be an issue there.

I forgot that they fixed ddraw upscaling but only for fullscreen, window upscaling is still broken since version 197.13