That's exactly what's happening - when I set 640x480 compatability and run the game, the screen flickers for a moment, as if to switch to that resolution, but then stays on 1024x768. The lowest resolution in the slider in Screen Properties is 800x600, I could set 640x480 using ATI's CCC but then all my icons on the desktop would get messed up (squeezed on 640x480 screen).
I know that hendroz somehow managed to create a windows installer which succeeds at forcing the game to run in full screen. Unfortunately I have no idea how to contact him.

@Collector: Yes, I know and I was referring exactly to this specific problem. I had exactly the same problem as Simplex before and the solution I provided worked just fine - also for all the other Sierra Windows games.
Just believe me and try it. 😉
(By the way, the XP installer from Hendroz does the same thing.)

I tried it and it works (kind of 😉 ) - I still get the title bar on top and taskbar at the bottom (ugly in 256 colors) but at least I do not have to manually switch resolutions every time I want to play. Perhaps somewhere I did something not exactly as I was supposed but I am content with what I got. Now if only the simultaneous speech & text problem was resolved, I'd die happy 😀

Wintermute, thanks a lot for the info, it was very useful.

Coming back to the text/speech problem:

Wintermute wrote:

Some of the earlier Sierra games were like this, e.g. Space Quest 4. Seems like many people complained so they changed it in later games. 😉

You are right - in SQ4 you also have to choose between text and speech.
However, you are at least provided with an option to do that through the option in the control panel (see attachment), which means that if you have problems with understanding a particular dialogue piece, you can always switch to text for a moment to read it, and then switch back to speech. In Freddy Pharkas it is impossible - to switch between text and speech you'd have to quit the game, fiddle with resource.cfg, restart the game. Though SQ4 solution is not perfect, it is better than the one in Freddy Pharkas. Pity it was not implemented in Freddy too.
I sent my cfg file to Al Lowe and also pointed him to this thread so there is still a chance that this will be fixed. Al Lowe is a great guy, by the way. He replied to my email very quickly and from what he wrote I see that he really wants to help, not just reply to the email out of politeness and forget about it.