I'm pretty sure your graphics card or the graphics driver is causing this. The first screenshot looks like either failing hardware or a driver bug.
Downgrading from Win7 to XP sounds like the wrong move. Drivers are usually older and buggier for Windows XP, so that likely exacerbated any driver problems. Try Windows 7 again and double check you have the latest drivers. (What do you mean by "minimal resolution"?)
Mind you 7 years old is pretty old for graphics hardware, you might be stuck with crappy drivers if the manufacturer has ended product support.