You guys are right. Switching to a greater resolution and manually setting the ISO does improve the quality. I have tried it before, but did not notice improvement, but do see it now at closer inspection. There is still plenty of space for improvement, though.

maxximuscool: Thanks. I am not "complaining" =)

I am surprised that decreasing the resolution increases the amount of noise. The noise looks like compression noise. As if a regular 5M picture is taken and then compressed into a small (dimension-wise) JPG with bad quality.

In any case I will play around more. Thanks.