Here is THE answer.
Windows expects square pixels.
The correct resoutions IS one tha corresponds to the aspect of your display.
5:4 1280x1024 - Many newer LCD panels in 17" and 19" models
4:3 - 1280x960 - standard CRT monitor
16:10 - 1280x800 - widescreen CRT or LCD monitor
16:9 - 1280x720 - widescreen HD resolution
There are 4:3 LCD panels that use a native resolution of 1280x1024, and they squish desktop icons.