Yeah, DPReview is the digital camera site. It’s even considered the bee’s knees by digital camera folk in Europe, Asia and Australia. The reviews are comprehensive, and the camera and lens test examples they provide have not been manipulated or enhanced in any way. They have examples of full-size (not reduced) images from nearly all of their reviewed cameras, even the massive 11 and 16 megapixel jobs. If you have any questions, i always found their forums very helpful also. Just make sure to do a search first, as people tend to get irritated with answering the same questions over and over.
It’s certainly true that megapixels (“resolution” is the term used in digital photography to describe this aspect of the picture) is not the whole story. As others have pointed out, the size of the sensor (and hence of each pixel) is important. A 6 megapixel SLR like the Nikon D70 has a 23.7 x 15.5 mm sensor, and has considerably better image quality than the 8 megapixel Nikon Coolpix 8800, whose sensor is only 8.8 x 6.6 mm. Basically, you’re not going to be able to get the large sensor unless you move up to an SLR, and you’re apparently not in that sort of market. Rest assured that small-sensor 4 and 5 megapixel cameras nowdays can provide perfectly good picture quality.
It’s not only resolution and sensor size that is important, though. Another issue is compression. For compressed images, you’ll be shooting in jpeg format, and it’s here that some cameras are better than others. To produce a jpeg, the camera takes the raw data and processes it, compressing it to produce a jpeg image that is smaller than a raw image. Some cameras have better inbuilt software than others for doing this. Most cameras have more than one jpeg setting, allowing you to make a trade-off between image quality and file size. My camera has three jepg settings—normal, fine, and extra-fine. The normal setting produces a jpeg of about 1Mb, fine gives a picture of about 2Mb, and extra-fine (which is my default setting) gives a jpeg about 3-4Mb in size on a 5Mp camera. I don’t think the Sony you’re looking at has a choice of jpeg settings, but if the default setting is good enough, then that shouldn’t be a problem.
My camera is a Minolta Dimage 7Hi, which i’ve had for almost two years. I’ve been very happy with it, and 5Mp is certainly enough for regular snapshots. I don’t print many pictures, i just have them on my computer, but i’ve seen really good 14x11" prints produced from cameras exactly like mine. I wanted something more than just a snapshot camera, so i made sure to get a model that allows a reasonable amount of creative control, things like a fully manual mode, aperture priority, shutter priority, etc. The Sony you’re looking at doesn’t have those things, but if you don’t need to mess with the settings yourself that shouldn’t be much of a problem.
I’ve got some of my pictures on the web here if you’re interested in seeing some examples from a mid-range, two-year-old 5Mp camera. Remember, though, that these online pictures are much smaller (generally 800x600 or 600x450 pixels), and that they’ve been compressed quite heavily for the web. Remember, also, that computer screens only display 72 pixels per inch, and so a camera that produces good-looking pictures for the web still might not produce great pictures for printing.
Oh, one more thing. Unless digital camera manufacturers have changed their practices rfecently (and i doubt they have), you’ll have to allow some space in your budget for a larger memory card, as most manufacturers ship their cameras with a crappy 16Mb card, which is effectively useless for a 4 or 5 megapixel camera. I can fit exactly 5 extra-fine jpeg shots on the card that came with my camera. What a fucking joke.
The good news is that compact flash and other memory cards have become much cheaper over the past couple of years. When i bought my 512Mb Lexar 24x Compact Flash card two years ago, it was about $300; now i could buy that same card (only even faster at 40x) for $49.99 at B&H Photo in New York (which is where i bought my camera; fantastic camera store).