You need version 1.2 or higher (see http://lab.dyne.org/Docking
); please check.
According to above page, it will still boot from CD, till a certain point. If you don't want that, see again above page. You need to install Lilo or Grub and I'm not experienced doing that (most normal installs do that for me, so I don't have to bother about it).
With reagrds to screen resolution. Some live CDs have the option to enter a setup while they're starting (F2 and/or F3).
I run Dynebolic occasionally from CD but I'm not sure about not sure if it offers a setup option. I'm however quite sure that it uses 1024x768.
It might have to do with your hardware. I.e. you might have a nvidia card and it might not be supported. For that reason it might use the generic vesa driver. I assume that after a HD install, you will be able to add nvidia drivers.
PS the configuration for the resolution is usually in /etc/X11 directory; not sure if that's available when running from Live-CD