ScreenGoo has reflective particles in the mix so it probably isn't what you're looking for. I tried it for my screen and it was way too bright. You probably want a neutral grey paint. Go to Home Theatre Shack and ask the DIY screen guys what you should use (it'll also be cheaper).
HTS DIY
The drop in image quality that you're experiencing is due to the warping function. You're effectively taking a 1280x800 image and compressing all the information in that picture into a lower resolution (yes, that's really what you're doing). Will work fine for games/video but fine features such as small font text will suffer.