Pixiq

Hi Amy
If you want a system camera that you can eventually expand upon with additional lenses, external flashes etc. then you need to look at the entry level DSLRs, or the micro 4/3 system cameras from Panasonic or Olympus.
There's also the new NEX cameras from Sony, where the camera bodies are the same size as a compact, but they take interchangable (E mount) lenses. The image quality of all these options will be very good, and you have options for shooting RAW if you want to get seriously into post editing later on.

If you really want to keep the size down you could consider a premium compact such as the Canon S95. (which can also shoot RAW) This will give you all the control you need and the image quality up to ISO 400 is really good. (Its not bad up to ISO 1600 but you'd notice a bigger difference compared to a DSLR at the higher ISO settings) This is not a system camera but you could get a slave flash for it later on (so you can do indoor portraits without shadows etc). The biggest plus is the size. I carry mine in a shirt pocket, and its with me wherever I go. My DSLR gets left at home quite often. You're not going to shoot sports action or wildlife with it though.