|This ia an unsurmountable problem related to the way LCDs work.|
LCDs have a native resolution at which they work at there best. At any resolution other than there native resolution they have to perform some digital jiggery pokery in order to make the picture fit. This is why you are getting the fuzzy image. Some monitors perform this jiggery pokery better than others.
With a native resolution of 1400 X 900 it is having to interpolate pixsels in order to fill the screen with 1024 X 768 pixsels and it doesn't like it becaase it is hard work.
It works this way becasue LCDs have a fixed pixel size where the older CRT monitors have an infinatley variable pixel size. The only way you can get round the problem and use two moitors with the laptop is to aquire an LCD monitor with the same native resolution as the laptop.