I have been trying to get this question answered for a while at Oragamis Project site and today I finally got a convincing answer:
Yes, VS 2005 should install on the device if you're in at least 800x600. I just tried installing it in a Virtual PC image of XP running @ 800x480, and it shows a message saying I should switch to 800x600 before continuing. I changed the resolution, continued, and all appeared to be fine (note: I didn't complete setup, I canceled out after the wizard started).
Sears is a program mannager in Oragamis Team.
He also confirmed that: When you hit the change resolution (aka auto-scale) button to go into 800x600, it's 800x600. Same as if you went into the Display properties and moved the slider over a notch to 800x600.