Where the bullet lands, relative to the sights, is dependent on the range. Sight image 3 works for close ranges because the bore is lower than the sights and at close ranges the bullet will impact below the top of the front sight.
At medium ranges, the bullet will rise to the level of the sights because the bore is angled slightly upward with respect to the sights. Sight image 2 works at those ranges.
At longer ranges, depending on how the gun is sighted, you'll likely have to switch to sight image 1 to make accurate hits.
Here's a more thorough discussion of the topic.
http://thefiringline.com/forums/showthread.php?t=503476