Yes you need to use the cd normally. But I do think there's a NoCD patch out there, just google it. Plus make sure you get the nocd patch made for your version of the game. There's been 2 patches for the game already so the newest is 1.02 I believe.
Nobody knows why 1280x1024 isn't there, but you can use that setting by changing one of the files. I can't remember which file as I didn't do it myself but it's possible.