Yeah. I played and tweaked the settings quite a bit, and tested various things - the default setting is pretty good compromise - so I ended up leaving it at where it is. The more important thing for good quality pictures is to use enough light. So instead of pondering jpeg compression (which is really not making a significant difference here) - add more light. Move closer to the window, add a desk lamp (and set white balance accordingly to tungsten if it is such) or be creative some other way. This is what makes the shot initially less noisy, thus requiring less noise reduction. This makes the most difference really.

I'll be writing a quick wiki tutorial about my experiences with the N900 camera.