Digital in-line holographic microscopy (DIHM) can achieve wavelength resolution both laterally and in depth with the simple optical setup consisting of a laser illuminating a wavelength-sized pinhole and a CCD camera for recording the hologram. The reconstruction is done numerically on the basis of the Kirchhoff-Helmholtz transform which yields a three-dimensional image of the objects throughout the sample volume. Resolution in DIHM depends on several controllable factors or parameters: (1) pinhole size controlling spatial coherence, (2) numerical aperture given by the size and positioning of the recording CCD chip, (3) pixel density and dynamic range controlling fringe resolution and noise level in the hologram and (4) wavelength. We present a detailed study of the individual and combined effects of these factors by doing an analytical analysis coupled with numerical simulations of holograms and their reconstruction. The result of this analysis is a set of criteria, also in the form of graphs, which can be used for the optimum design of the DIHM setup. We will also present a series of experimental results that test and confirm our theoretical analysis. The ultimate resolution to date is the imaging of the motion of submicron spheres and bacteria, a few microns apart, with speeds of hundreds of microns per second.