If I take any of my LCD monitors and run the resolution lower than the native, it's never as crisp as the native resolution. I just took my 20" HP monitor to 1280x1024 from its native of 1440x900 and things got blurry. What you're saying isn't making any sense.
Mate, read orange.x's post above. He explains that you need to be using the same ratio as your native resolution, i.e. 16:9.
1280x1024 is not 16:9, however 1440x900 IS 16:9, so obviously it will look blurry because the image isn't stretched properly. Try out another resolution that can be divided by 16:9 and then tell us your results.
This is exactly gainly's reasoning why the scaler won't be necessary with the new iMacs. The native resolution of the new iMacs is divisible by 16:9 (unlike the older ones). 16:9 is the resolution that the XBox outputs high-definition image. Therefore there won't be noticeable degradation of the image, just a larger image.
There also WILL NOT BE ANY LAG.
Like I mentioned previously most PC gamers don't play games at their monitor's native resolution anyway because it's too taxing on the graphics card. For example if you want to play Cyris on the 27 inch iMac through boot-camp you won't be able to play it at the iMac's native resolution without significant lag but people don't cry and moan about that do they?
RealEvil, you're a star.