I've been looking for the answer to this question for a loooong time. I've owned my laptop since Jan '11 and am have some time over the summer to play some games. I know the basics about PC gaming, and I think in theory, my rig should be able to play games that were made in the last 3 years or so on medium levels.
Intel Core i5 (M 460 @2.53GHz)
4 GB RAM
Windows 7 64x
GeForce GT 425M
Plenty of hard drive space
I have done one format since I've had it. I reinstalled all drivers and everything works fine, but I get the sneaking suspicion that whenever I play a game, the system is using the integrated "Intel Graphics Media Accelerator" instead of the Geforce. I know there are a few video-type control panel programs that may be warring with each other for control. I can use the NVIDIA one to select specific programs to utilize the GeForce, but I don't think it really is.
On the other hand, things might be working fine, and I am grossly overestimating my humble laptop.
Check under your power saver settings. Odds are the computer is set to use the integrated GPU to reduce power levels (usually when unplugged). Switch it to the high performance settings, whatever it is specifically.
What games are you trying to play? I agree that your GPU should be able to handle most newish games at medium settings.
I agree your GPU should be capable, as has been stated check the power management settings.
If those look ok, check your bios just in case there is something set in there forcing the use of integrated graphics, also there may be the option to turn integrated off entirely however if you do that remember to re-enable when you want your battery to last.