OK, so, it really should be ext sync. Hard to tell from the pics but I think you have ext sync hooked up. make sure both inputs are set for RGB / Ext Sync in the normal PVM menu.
Check here and DL your manual: http://www.neo-geo.com/forums/showthread.php?248672-PVM-Service-Manuals-20M2MDU-and-others
You will need Section 3 - Set Up Adjustments starting on page 19 of the PDF. This explains how to access the service menu, and default settings and setting ranges for most common adjustments. Basically you need service mode I. Pretty much you hit menu, and then enter+degaus, but I still recommend you read the directions carefully. Once you're in the service menu find the adjustments for NOR 60 DEF : H FREQUENCY and VIDEO PHASE. If in doubt set them to the 'std' value (standard) in the menu first, and then adjust to center the picture. If one of those two is too far off it will cause the distortion up top that you are seeing.
If that does not get you going, bust out a multimeter and set it to ohms. Probe the resistors by the scart socket and check their value. If they are under 220 ohm I would recommend replacing them with 220 ohm resistors; that value tends to work for me with 20M2MDU's with all my superguns and JAMMA boards.