I really love my Canon Powershot A camera (I think they're up to 8MP now, although mine is a 6MP and just as good). It's simple to use, takes great pictures, and really reasonable in price. I got mine for $230--that's with tax and shipping, AND I got loads of free stuff with it: a full-size tripod, a 1GB SD card, a camera case, and rechargeable batteries. I'm sure if you got just the camera, you could probably find it for $200 or less.
It's a little bigger than some of the really small compact cameras out there, but it's still pretty small. I like that it's a little bigger than a compact because my hands can be unsteady and if I can't capture the image right away, they come out blurry. This one's easy to grip, so I come out with crisp pictures every time.
Hope this helps!
Jennifer