Hunter81, I don't believe that it is possible to change the resolution, however I am not on the Photosynth team, so you may want to wait for an answer from them.
I could be wrong, but I believe that the reason that the resolution of each still shot captured to be stitched with the Photosynth app is low is because it is using the iPhone's camera in video mode, rather than still photography mode. I believe that this is necessary to do the realtime tracking of the viewfinder against the panorama shot thus far.
I am also not sure what the memory limits are for iPhones stitching together higher resolution stills or how the image quality differs between iPhone 3GS, iPhone 4, iPad 2 and iPod Touch 4. Presumably, the app uses the same resolution stills on any of those devices, but I might be wrong about that as well.
I agree that it would be excellent to have devices with higher resolution sensors to be able to capture better images. How do other panorama apps compare?