For clarity I should probably have stated in the text that this is an
issue on 10.10 Beta, though this can be seen from the diagnostics.

Following further tests I can now confirm that this appears to be an
issue with the total width of the virtual display being too large
(possibly > 2048?).  All is well if I have resolutions of 1024x768 on
both displays or 800x600 and 1024x768.  The problem appears if I try
1280x800 and 1024x768 for example.

I have Visual Effects set to None, though setting to Normal seems to
have no effect on the issue.

-- 
Dual head problem - can't use both monitors fully
https://bugs.launchpad.net/bugs/644359
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