I too wondered about this some time back when I first got my FZ10. I took two pictures using the two resolutions and zoomed in on certain parts of the pictures. When placed side by side, both started to pixelate at about the same enlargement setting and at some points, the lower resolution setting seemed to render more details. For example, the aircon units of a factory showed details of the fan blade in the lower resolution picture while the higher one seemed smudged.
Still not sure about it now, but since getting the 512mb card, I have left it at the highest setting.
Anyone with more information care to shed some light on this?