Tony, your camera is just digitally zooming the image and then reducing its size. There's no way for your #x lens to project an image on the sensor any bigger than it normally does.

Andy, reducing the resolution in camera doesn't leave you with a better picture ever. it just leaves you a down sampled picture. Everyone down samples whether they know it or not. When you put your images on flickr, facebook or wherever, they're going to scale and process the image. When you print, the image again gets processed, you don't have to do it manually.

If you're not going to do anything at all but select a lower megapixel image size from your camera's settings, you're only saving space. You will never have anything better than you would by leaving it at its max.

All the noise reduction and other enhancement features are applied to the native image if those options are available and turned on. Again, the only thing you're getting is a very quick bicubic (hopefully) down sample. Most software is going to do this on a PC or server without flinching and with better results. Further, many one-stop enhancements will feature a lot more than a simple bicubic reduction for even better results - that you still won't have to wait around for terribly long. Most photo cataloging software has batch abilities for stuff like this. But we don't need to be concerned with "most people" anyway, since we're making recommendations only to one person here.

And the recommendations were about getting better pictures. Shooting at native resolution and then processing in desktop software is what's going to get you the best pictures. Shooting in RAW even better still if you have that option available (some older Canon P&S do with a firmware hack)

If you're going keep a camera set at a lower resolution, I suggest saving money as well by buying a camera with a less dense sensor. At least then you have physics working for you with larger photosites. Pick up a 5MP or 7MP Canon and save a ton of cash, time and space.