Regarding quality:
I capture in 2272 x 1704 High Quality JPEG. Mainly because of the space requirements for RAW and because I can take 2-3 shots on a breath-hold in JPEG whereas, probably only 1 with RAW. My camera does not do much processing after a shot, ie. Noise Reduction, so I do not worry about differences there much either. However, for you guys with cameras that do that processing or such, you may want to look into WHEN the processing is done on the camera. It is important to consider if the Noise Reduction, or other processing, is done on the RAW pixels and then JPEG compressed (which is most likely I think). If it is processed after the compression, then there is no point to allowing the camera to do the processing, if you have computer software to do such processing. Computer software gives you complete control of the processing and is usually better and more flexible. If the compression were done first and then processed, then you are processing a picture that is already distorted slightly. So the processing will be inferior to that of RAW processed data. So ideally working with RAW would be my choice to be able to have complete control of the end-picture. But getting good shots at HQ JPEG by working on the aspects of good photography (lighting, angles, composition, manual settings, etc...) you can reach a point where processing is minimal hopefully.
Regarding contrast and sharpness:
I play with contrast and brightness in software often. It can be invaluable to getting the picture you wish for. I find it especially usefull when you have a particular subject in the picture (ie. fish, nudibranch, coral, etc...). By adding contrast to the picture you can bring out the subject while the background diminishes. This keeps our attention focused on the subject. It is amazing how much psychology goes into viewing a picture. You can look at a picture with your subject in it and say "that is a nice picture". But something just makes you feel like for how perfect the picture is, it does not hold you so. Then by contrasting the subject, you suddenly realize that the environment in its whole is a little distracting from the amazing focus on the subject. Little particles in the water, seaweed strips floating around, and cloudy areas, pull our attention away from the subject, even though it does not feel like they are. You only notice it when you compare the original with a contrasted version.
Sharpness on digital cameras is solely done by internal processing I believe? Can somebody confirm this? Which would mean you should always leave it at the highest sharpness, which would be the most raw image. Later if you want the picture softened you can do this in software. This will be ok to do even though the compression has been done already. However, doing softness last in software allows you to add other processing on the more raw version of the photo before you soften it up.
Cheers,
Tyler