Font quality is poor when resolution is set to 1280x1024

I would say this is a problem with the hinting settings.

Make sure you're using high quality (TTF) fonts, for example Bitstream, DejaVu or Microsoft fonts (msttcorefonts-package).
In some cases it's better to choose "Autohinter" instead of "native", you have to experiment a bit if you're not satisfied with "native". Now check if hinting is activated in gnome, the best option is "full". Also make sure sub-hinting is activated an the right color-order is set (take a magnifier to find out which order is the right one for your display, in most cases it is RGB).
To take effect on all changes save all of your opened documents, close the apllications and press [ctrl]+[alt]+[backspace] to restart the x-server.

There is an additional patch to improve hinting: http://ubuntuforums.org/showthread.php?t=343670

If you use Firefox as your web browser make sure "font.Freetype2.autohinted" and "font.Freetype2.enable" are set to "true". You can achieve this by tipping "abou:config" in the adress field and doble click on these entries if they are set to "false".

I don't think your problem is a bug but misconfiguration. So try out these steps, I hope they will help you.

EDIT: You have to type "about:config" in Firefox. Choose good fonts in Firefox, too.

As I have seen that I have rubbed out some text (probably moved the cursor with the touchpad) I will post the corrected instructions again:

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I would say this is a problem with the hinting settings.

Make sure you're using high quality (TTF) fonts, for example Bitstream, DejaVu or Microsoft fonts (msttcorefonts-package).
Make "sudo dpkg-reconfigure fontconfig" and after that "sudo dpkg-reconfigure fontconfig-config". Choose "native", then "always" and at last "no". In some cases it's better to choose "Autohinter" instead of "native", you have to experiment a bit if you're not satisfied with "native".
Now check if hinting is activated in gnome, the best option is "full". Also make sure sub-hinting is activated and the right color-order is set (take a magnifier to find out which order is the right one for your display, in most cases it is RGB).
To take effect on all changes save all of your opened documents, close the apllications and press [ctrl]+[alt]+[backspace] to restart the x-server.

There is an additional patch to improve hinting: http://ubuntuforums.org/showthread.php?t=343670

If you use Firefox as your web browser make sure "font.Freetype2.autohinted" and "font.Freetype2.enable" are set to "true". You can achieve this by tipping "about:config" in the address field and double click on these entries if they are set to "false".

I don't think your problem is a bug but misconfiguration. So try out these steps, I hope they will help you.

this is not a bug. but an old misconfiguration issue. friedchicken told you how to handle this issue.

Will the patch mentioned above be included in Ubuntu in future?
In my eyes the hinting is *far better*, especially with small fonts (10 pt an smaller) and even problems with spaces between letters are solved. The patch shouldn't do any harm to people using non-TFT monitors or have hinting disabled but will help most of the users.
Additionally better fonts should be standard, I favor DejaVu but Bitstream is also good and often used by Debian.

Is this supposed to be fixed in Intrepid 8.10 firefox is especially horrible and the fonts are blinding me at this resolution. what can i do in Intrepid.