Maybe it's just my display, but I don't have a problem with the image quality in games when the resolution drops down.
I run a Silicon Graphics 1600SW... it runs at 1600x1024, and I have the MultiLink adapter, which doubles as being able to drop the resolution on the display. Maybe it's just really good at it, but I've recently been playing AoE II, civilization III, and Black and White at 1024x768 (at 4:3, not stretched) and 800x600 for Black and White, letting the display stretch the image to the full 16:10 aspectr ation. The images look great, I don't even really notice.
But again, maybe it's just my display. Now if I drop down the resolution while not in a game, yeah, it's quite painful...