Thank you for your insight Fraser, you sure are a living IRpedia!
Indeed as you described, it is a setting thing.
When one goes to: Settings - Save Options - Photo as seperate JPEG: and choose "ON", it will save the digital camera photo as a 640x480 JPEG file.
But when this option is set to "OFF", you will have the digital photo resolution of 320x240, as shown in Summer's screenshot above.
This is regardless of the "Digital Camera" only setting in the "Image Mode" option in the main toolbar (menu button press).
Strangly though, in this "Digital Camera" (only) mode, it makes the first photo (that would normally be an IR photo) in 320x240, but the (second) photo (that would normally be the visible camera photo) in 640x480.