No changing of res for FF7 PC, sorry. (Well you can set it to 320x240 if you really want to.)
If you have the PSX version, you can run it in ePSXe and crank the resolution up as high as you want.
ANYWAY
I used 1280x960 for a while, because it was the proper 4:3 resolution... but I switched to 1280x1024 after a few days, because hey, more screen space AND I think it looks better. Doesn't look stretched or squished at all to me.