It won't look at sharp as it would on an HDTV because even after the recent dashboard update, the 360 is still having to upconvert the signal to your monitor's resolution, which is not the same as changing the resolution setting in a PC game. The 360 doesn't actually render the games in that higher resolution, so any fuzziness you're noticing is due to that. So if you're comparing the picture to what you'd get on an HDTV, you'll likely never be satisfied without changing to a lower resolution monitor.
So yeah, it's likely an issue of you expecting it to look better than it can. I went through the same thing when I first bought my 360 and tried to use it on an LCD monitor. It definitely wasn't a setup issue, just an expectation issue.