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The problem is that your camera is only compatible with SD cards, not
SDHC cards. You bought a larger card for your older camera, not
noticing that it was SDHC (or not knowing that it mattered). The new
card doesn't work, not because it or the camera is broken, but because
it's not compatible.
Cards up to 2Gb are generally SD.
Cards of 4Gb are generally SDHC.
Cards over 8Gb have to be SDHC.
(There are exceptions. Sometimes, manufacturers make 4Gb SDHC
cards but some have errors; they disable half of the chip and sell it
as 2Gb, but it's still SDHC. 4Gb cards are almost always SDHC because
they're cheaper, but 4Gb SD cards do exist. They are so rare that I've
even seen a guru on this site claim they don't. I did own one once, but
it was very expensive and turned out to be so unreliable that I had to
return it. I don't recommend
looking for one, because of the problems.)
Your solution is to go find a 2Gb card, and be extra sure that it
doesn't say "SDHC" on it.
The DMC-LZ2 is specified to work with SD cards, not SDHC cards. While SDHC cards are physically compatible with SD cards, they will not work in SD devices. SD cards will work in SDHC devices, but that doesn't help you any here.
It's a hardware incompatibility. No firmware update can get around it.
I'm guessing you bought a new 4GB SDHC card. Although it looks exactly the same as a standard SD card, the format the card uses is very different. If your camera is more than a few couple years old, it's likely it was designed before the SDHC format came out. Sorry, but a SDHC card will not work with older cameras.
For older cameras, you'll need to use standard SD cards (usually those 2GB or less). But if you really want to use a 4GB card, do a Google search for 4GB SD "non HC", with the non HC in quotes. Believe Transcend makes one.
I'm guessing you bought a new 4GB SDHC card. Although it looks exactly the same as a standard SD card, the format the card uses is very different. Unfortunately your camera was designed before the SDHC format came out. Sorry, but a SDHC card will not work with your camera.
You'll need to use standard SD cards (usually those 2GB or less). But if you really want to use a 4GB card, do a Google search for 4GB SD "non HC", with the non HC in quotes. Believe Transcend makes one.
Sorry for the extreme delay in answering your question: I've been trawling for old unanswered questions today and yours came up. The following answer will undoubtedly be way too late to be of use to you, but may assist others searching FixYa for an answer to the same problem.
You have been mistaking SD cards for SDHC cards. They look the same but are different, and your camera cannot use SDHC cards as it was designed before they existed. The limitation is due to the hardware in your camera so it cannot be updated to SDHC standards.
Your 2GB card was definitely an SD card as SDHC cards have a minimum capacity of 4GB, and 2GB SD cards are the maximum capacity which your camera can handle. Your only fix is to either stick to 2GB maximum capacity SD cards or to replace the camera with one which is SDHC compatible.
Do the 4GB Cards say SDHC on them? They should. SDHC is simply "Secure Digital High Capacity". They're high capacity SD cards that hold more than regular cards. In this case, 4GB. The problem with these is that they need to be supported by the device. I've never put an SDHC card into a device that doesn't support them, but it looks like that's what your situation is. The highest memory capacity a non-SDHC compliant device is capable of 2GB. I recommend that you return the 4GB cards and buy 2GB cards instead.
I recently bought a DMC-TZ3 and have been researching memory cards. Several sites sell cards with the camera and list the card type. I would suggest buying one of these cards. Any cards larger than 2gb must be SDHC type SD cards. There appear to different types of SDHC cards, 1.0, 1.1 and 2.0. Check out Wikipedia.org for a description. 2.0 cards are not compatable for devices developed prior to 2.0 so that may be the reason for the camera problem. So far I haven't seen anything that states what type SDHC card the camera requires. I found a computer memory site that that sells memory that they say will work. There may be others. http://www.mymemory.co.uk/compatible-memory/Digital_Cameras/Panasonic/Panasonic_Lumix_DMC-TZ3