I don't play that game, but have found additions to above work well:
hi-res=1, use pixel shader, vram=512mb, compatabilty= 1-2-1,
Hi-Res textures of 1 will be bad for this game. It will create glitches in 2-D. Best to turn it off, or optionally set it to level 2 if using texture filtering of level 2.
VRAM amount is, obviously, dependent on the actual GPU's VRAM amount. I know the topic starter has 512MB VRAM, but I'm pointing this out so other people who unknowingly set it are aware that it's dependent on a system condition, and not an option always best set to 512.
Compatibility is game dependent.
As for the topic creator, there's two main things that stick out to me.
1. As was mentioned already, set the internal resolution higher. This will likely help a pretty good deal (it will theoretically make things 2x sharper).
2. Your resolution of 1680x1050 fullscreen. Why is this a problem? For one, you're stretching 320x224 (yes, that small!) images up to 1680x1050. You're also fattening everything by stretching a 4:3 image to a 16:9/16:10/16:whatever ratio. I'm just pointing this out, because alot of people think that a good GPU and high resolution automatically should, theoretically, net awesome improved visuals. This doesn't work that way. This isn't something you can't really "change" (besides using a lower window resolution, or playing with filtering to help some, which will be method 3). This is just a bit information for your knowledge, as if method number one doesn't fully make it look good to you (it may, who knows), then this will be the reason why it still doesn't.
3. Try enabling filtering, and maybe Hi-Res textures too. I recommend trying each option at level two for starters. This combination works very well for 2-D games (and even 3-D games) in my testing.
4. This isn't a problem or related to improving visuals, but I recommend setting "Render Mode" to 2. Your GPU supports it, and if I remember right, it's uses come into play at higher resolutions, etc.