Comment 14 for bug 777586

You've got the laptop and external monitor set to mirrored. Mirrored means "Make both monitors look the same" so X has to select a resolution that both monitors have in common. LVDS1 supports 1280x800, 1024x768, 800x600, and 640x480. VGA1 supports 1280x1024, 1024x768, 800x600, 640x480, and 720x400. You can see only three resolutions are in common and those are the three you are given as options.

Uncheck the 'mirrored' checkbox and arrange the monitors side by side or one over the other, then you can use both at their maximum resolutions. Or else turn your laptop monitor off when you're connected to the external display.

Or, if you want something more exotic than gnome-display-properties allows, you can do whatever you want using the xrandr command line tool. For instance, you can set up viewports, scale or pan, and so on. However these more advanced options are generally not what average users are looking for, thus aren't supported in the GUI config tool's design.