I agree completely with both of you, but 1280x960 on a 3.2MP is High Res (set at the FINE setting). Sure you can set it for higher, just in case you need a life size poster of you and Goofy, but when you run out of memory after only a few pics... you may change your mind. Don't just pick the highest setting because its available, choose the right setting for the application you are using it for.
p.s. I would suggest taking the the same pic in daylight and low light on each of your cameras settings, and then go print a picture of each. This will only cost you a couple bucks and then you know what your camera can do. Also, look at your lcd screen and compare how many pictures your camera will hold when set at the different settings, if you have it set at the highest setting and you are only able to store 25 pics on your memory stick, is that worth it to you for something that you will most likely never need? Do what makes sense to you and have fun!