The problem with 5:4 is that 4:3 has been the industry standard for a long time. When you have a 5:4 monitor, some applications, even today, do not scale images properly, especially when you run them in "full screen mode". What ends up happening is that 4:3 content gets stretched to fill a 5:4 frame, leading to slight distortion (vertical stretching).
I have a 1280 x 1024 19" LCD (5:4), and the latest version of ATI TV player (for the All-In-Wonder cards) stretches 4:3 TV to fill the entire screen when I watch in full-screen mode.
Earlier versions (like the one I run now) are smart enough to stretch the picture while preserving the aspect ratio, so I get black bars at the top and bottom. I'd rather have small black bars at the top and bottom than a distorted picture.
And Windows is not smart enough to preserve the aspect ratio of desktop wallpaper either. Most made-for-desktop pics come in 4:3 (or maybe widescreen) aspect ratios, so you if use the stretch option, they get distorted. And if they are too small or too big, then the "centred" option is useless. Now, whenever I wanna set the wallpaper on a 5:4 monitor, I use a 3rd party application that is smart enough to scale the picture properly.
The other thing is that sometimes I do wanna run non-native resolutions (e.g. for gaming, especially 2D/classic games) on my LCD. Now obviously blurring due to interpolation is unavoidable, but it would be nice if I could avoid the vertical stretching. Unfortunately, my monitor doesn't support stretching while preserving the aspect ratio (I understand some of the higher-end 20+" monitors do), and neither does my ATI video driver. (I know that current nVidia drivers do support "stretch+preserve ratio", at least for widescreen LCDs. I used that feature to play 4:3 games on a widescreen laptop.)
The funny thing is that everyone in the industry seems to be pushing customers to throw out their CRTs and buy LCDs of all kinds of different shapes and sizes (4:3, 5:4, 16:9), but the software support for screens of different shapes still isn't completely there. (How hard is it for Windows to zoom an image while preserving the aspect ratio? Image viewer applications do that all the time.)