It should not matter what size/quality you have set in camera. What matters is the settings when you go to save your image for upload to DPC. I suggest that unless you need to conserve space, capture the highest quality image you can in camera.
Once you are done with editing in Ps, save your high-quality image at full resolution. This way, should you need it for non-DPC uses, you have the high-resolution edit. Next, reduce the image size to 1200px on the longest side and save for DPC. In CS3, the appropriate way is to use "Save For Web" and to set the quality to whatever gives you a size just below the 700 kilobyte limit.