Sounds like the same problem with the laptop that I recently got (and am currently posting from

) Might I inquire as to what your graphics card is?
All I know is that my AMD Radeon HD 6470M does the same sort of thing. It's just the way the graphicsi card was produced. For some reason, of which I do not rightly know myself sadly, it will not stretch to fit the screen and screw with older graphics.
This has happened to me with a variety of games such as JKA, both KOTORs, and numerous others. Now of course, I mainly only had the problem of non stretchy resolution rather than the blocky graphics, but if I had to hazard a guess, it is probably your graphics card.