The reason why its blurry is because unlike CRTs which use an image tube to display what you see, it uses LCDs and the native resolution is how many pixels you have on the physical screen. If the native resolution is 1280 x 1024 then if you were to count em all , your screen would be 1280 pixels wide and 1024 pixels tall. if you go lower than natvie resolution, it has to calculate where to put the lower amount of pixels because you are trying to use less pixels on a screen that requires a certain amount of pixels. This is why it is blurry at lower resolution. You can try to instead leave it at native res and convert XP to use 120 dpi instead of 96 dpi. Just go to Control Panel>Display>Settings>Advanced in the "General" tab there should be 96 dpi, change that to 120 dpi and restart your computer, leave the resolution at 1280 x 1024. This forces XP to use larger fonts and images.
EDIT: Assuming you do have Windows XP, I think other OSs have this option too.