Multiple Displays, Multiple Resolutions

There is a place in the BIOS usually in Advanced>Integrated Chipset that allows you to select how much RAM the Integrated Graphics uses. It is probably set to 1G based on the Specs you listed for your computer. you might be able to increase it to see if that allows the graphics chip to use more and thus allow a higher screen resolution.

Note: the Graphics Chip shares RAM with the total you have on your comp so if you have 4G of Ram and you set the graphics to use 2G then you will only have 2G left.

Edit: Be very careful with BIOS settings and if you are worried about something or if something looks different than I described, post here first for help

Maybe when the ATI Radeon 3200 detects multiple monitors it drops the max resolution of both devices to something that it can manage? A memory limitation perhaps? <--DarkStar had posted this. I was just furthering a possible fix proposed by a fellow sfer

It's the graphics card's memory, not your system wide memory. You need to upgrade to a better gfx card if you want to run dual monitors without them being mirrored. If you don't want to break the bank, an ATI Radeon 4000 series or a GeForce 9000 series should do the trick.

I'm currently running a 9600 GT and it can handle an extended display of two monitors just fine.

I would also suggest getting a dedicated graphics card. All BIOS's are different and your BIOS might not have the ability to change how much RAM your card uses.