Oh dear not again.
There is no incorrect resolution but a maximum just as with a CRT. A 1280x1024 application forced to fill a 4:3 CRT results in distortion (horizontal stretching) just as a 1280x960 application forced to fill a 5:4 LCD results in distortion (vertical stretching). The BF series only supports 4:3 so 1280x960 is correct and allowing or forcing it to stretch to the maximum on a 5:4 LCD will be incorrect.
Many panels do not offer scaling options. ATI and NVIDIA do offer driver scaling options when connected by DVI (limited and comprehensive, respectively). For ATI, it may be disabled from the Displays Tab under the FPD button.
For whatever reason, some folks choose to force cropping and/or stretching simply to fill a given screen area (can you say Pan & Scan?). But I don't see the point, especially when the image size is large enough in the unmolested aspect ratio. Even with an analog panel sans scaling options one may as well let the panel stretch for "free" rather than burdening the graphics system with it. But really, how can blank space bother one more than Distort-O-Vision?