Most frustratingly this feature DOES NOT WORK on battery. As soon as you close the lid, the computer sleeps. You wake it up, hoorah, it goes to native monitor resoluation so you are not forced to run at the Macbook 1280x800 resolution. With dock.
That joy lasts about 2 seconds as the macbook goes back to sleep. And again and again and again.
Morons, apple. Morons.
Just get InsomniaX and it won't go to sleep when you close the lid.
I can see why apple made it the way it is, because if it were possible(by default) for it to be running on battery while the lid was closed, that could drain your battery pretty fast if you think it's off since the lid is down.