The pocket-sized requirement is the tough element here. Unless you've got big pockets, the Canon PowerShot G10 isn't going to fit in your pocket, either. And you mentioned that you believed the XSi would require more skill to get good quality. That's really true for any camera. The XSi and other entry-level DSLRs all have auto modes just like point-and-shoot cameras. So you can do point-and-shoot photography with them and image quality will be better. But they cost more and they're not as easy to carry around.

Your budget is fine. You should be able to get a good camera that fits your needs for about $400. Ten megapixels should be fine for the size of prints your're talking about - more tha enough, actually. To get you started, take a look at these two cameras and let us know what you think. They're on the big side for pocket cameras, but they'll fit. And they're very powerful little cameras.

Panasonic Lumix TZ5 >>
Canon PowerShot SX110 IS >>

If you want true pocket size, then the Canon PowerShot SD series cameras are an excellent choice. I actually own the SD950 IS and aside from the lens not being wide enough, I love it. You can read my review for that camera here:

Canon PowerShot SD950 IS Pro Review >>

Let us know what you think of those cameras - how they fit or don't fit your needs. Then we can give you some more direction. Don't get too caught up in megapixels. They are overhyped by camera companies. For the size of prints you're talking about, I think 8-megapixels and up will work just fine.