I'm playing this in a WinXP virtual machine.
And first problem I am encountering is the screen resolution : 640x480, so i'm looking at a tiny window!
When i exit the game (i don't even know how to do that without just ending task), my virtual machine's screen resolution also gets changed to 640x480.

How can I change this?

Use Alt+X to exit the game. Many other old games use similar combinations of Alt or Ctrl with X or Q.

The Privateer 2 Unofficial Patch makes the game output at the current desktop resolution (upscaled from 640x480). You might need to set the guest desktop to a standard resolution and/or disable the virtual machine's resizing feature to have it detect the desktop resolution correctly (I haven't tried this game in a virtual machine).

Alternately you can run the game on the host in a native version of DOSBox (you might need to adjust the paths if you're using OS X or Linux).

Thanks.
I've installed the GOG game on my host OS (win7), used the Unofficial Patch and am now doing well.