Here's the replu I recd elsewhere - this is correct - I tried it and this fixes the issue I had
-----------------------------------------------------------------------
OK,
You get two sides to the control dial - one is 'creative' mode, the other 'basic' mode. The split point is the green square.
From the green square through the 'no flash' icon on the control dial is the 'basic mode'. From P through A-DEP is creative mode.
I think that in the basic modes, jpeg or whatever you set is used. In the creative modes, you get the choice, but this is seperate from the previous setting. Put the camera in 'P' and then go to the menu. The quality setting is on the first tab. For jpeg, you want the setting to be Large/Fine or Medium/Fine. See:
http://www.dpreview.com/reviews/canoneos300d/page9.asp
I think the setting in 'P' carries through the creative zones. You should be able to check just by rotating the control dial.
For what it's worth, I nearly always shoot in 'P' - that way I can turn off the annoying focus beep
Hope that helps,