I can confirm this is present for me:
Dell Dimension 5150 with ATI Radeon X600 256MB (of which 128MB is system RAM)
Ubuntu 12.10 Quantal
It worked fine in 10.04 at 1280x1024 on both monitors, and works fine on 
Windows 8 at the same resolution. Monitors are a Dell E196FP (connected via 
VGA) and Liyama ProLite E4315 (ancient but works fine, connected via DVI). I 
have used Precise, but only with mirroring so I can't say about that.

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You received this bug notification because you are a member of Desktop
Packages, which is subscribed to xorg-server in Ubuntu.
https://bugs.launchpad.net/bugs/983269

Title:
  Screen Resolution exceeds 3D hardware limit

Status in “xorg-server” package in Ubuntu:
  Confirmed

Bug description:
  "Displays" Screen Resolution error:

  "Requested size (2104, 1920) exceeds 3D hardware limit (2048, 2048).
  You must either rearrange the displays so that they fit within a (2048, 2048) 
square
  or select the Ubuntu 2D session at login."

  ProblemType: Bug
  DistroRelease: Ubuntu 12.04
  Package: gnome-control-center 1:3.3.92-0ubuntu4
  ProcVersionSignature: Ubuntu 3.2.0-20.33-generic-pae 3.2.12
  Uname: Linux 3.2.0-20-generic-pae i686
  ApportVersion: 1.95-0ubuntu1
  Architecture: i386
  CheckboxSubmission: e28f23d40ba6960d2759044b1acbd380
  CheckboxSystem: c69722ecac764861be52925fa50b4dcc
  Date: Mon Apr 16 19:24:06 2012
  ExecutablePath: /usr/bin/gnome-control-center
  InstallationMedia: Ubuntu 12.04 LTS "Precise Pangolin" - Beta i386 (20120328)
  ProcEnviron:
   LANGUAGE=se_NO:nb_NO:nb:no_NO:no:nn_NO:nn:da:sv:en
   LANG=se_NO
   SHELL=/bin/bash
  SourcePackage: gnome-control-center
  UpgradeStatus: No upgrade log present (probably fresh install)

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