mayoor said: … I wanted to know whether I should first use Photoshop to reduce the size of the images to about 3 inches & the resolution to 300 ppi. Would doing this degrade the image quality. After reducing the size & resolution, should we save in JPEG format or as PSD files.
I'll give you my two cents on this. As David says, reducing image size in Photoshop gives you more control. It's also true that you might or might not need that.
If your output quality is critical (a fine art book, for example, or a very high end magazine) with a 175+ lpi screen or >200 “lpi” stochastic screen, then go ahead and resize in Photoshop. Save as a PSD for future use and repurposing. If you need to make more adjustments than just resizing, definitely save as PSD in case you need to tweak later. If it's memory or performance that's the problem, then save as PSD and then additionally save as jpeg for placing in ID.
If you or your clients are very quality conscious, always save as PSD if you will be using the image for different purposes. Use the Smart Filter feature in CS4/5 so you can adjust the sharpen for the specific output. Screen, magazine print, newspaper print, inkjet print, poster, billboard and digital display all have different optimum sharpen settings.
If output quality is normal (regular book or magazine printing, say), then unless you need to adjust brightness, contrast, sharpening, etc., you will save time by placing the original jpegs and letting InDesign take care of the downsampling, because there won't be any problem with the final printed product. This can be important if you have a large number of images to place. (Keep in mind, though, that almost any digital capture needs sharpening for intended output.)
I use both workflows, according to need. Unless you can guarantee that an image that could be reused won't be opened, saved, opened a month later, saved, open in November, saved… it's best to have a policy that heads off compression artifacts before they ever have a chance to form, and save as PSD. Always saving at quality 12 slows down, but won't eliminate, image degradation.
Even jpegs fresh out of the camera can have compression issues unless they were captured at the highest quality jpeg setting. Let's not even discuss images that come off the web (always super-compressed), and that the client wants to use full page, full bleed on the cover of his spiffy new brochure…