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The Olympus compatibility chart on their website says that your camera works with type M and M+ sizes 256MB - 512MB. The chart also says 256MB - 512MB for type H and 16MB - 512MB for standard xD cards. It looks like the largest size xD you can use of any type is 512MB. The D560 is quite an early digital camera and it is not unusual to have card size limitations.
The answer is YES. Be aware thate there are 2 types of XD cards: type M and type H. The type M it is not recommended for movie recording with your S5000 camera. The type H does not have this problem. Here is fugi compatibility site : http://www.fujifilm.com/products/digital_cameras/accessories/card/s/
I hope this helps, I called Olympus for the exact same reason. The tech told me that the highest for the older D560 was 512mb. The other DX cards are for the newer models (same name!) that are 3D etc. effects of the newer models.
Can't be much help on this one I'm afraid. I too have a C5050 and have numerous cards the largest of which is 512MB. I wouldn't like to use anything bigger than this just in case the card fails. I don't like having all my eggs in one basket. I quite often change cards on a shoot well before they are full also for the same reason. . Not so expensive to replace as well when they do go wrong. I also have an XD card loaded at the same time and swap between the two frequently
That said to date I haven't had a CF or XD card fail on me as yet, but theres always a first time. I've also never had any problems with the C5050 recognising any CF cards of any type up to 512MB in size and cannot see any reason why they would fail to use a 1GB or above.
What is the advantage of a 1 gig over two 512meg cards:
Usually the 1 gig will be priced lower than 2 512 cards.
The 1 gig card will hold twice as many photos.
That is about it.
Brand name has turned out to be a non-issue for almost all memory cards. They have to be made to a standard and they will all work.
Olympus and Fujifilm came up with the xD card.
And Sandisk is a trusted card maker.
I believe that Olympus may have a stitch feature that is only available if you use the Olympus brand of card.
A gimmick to sell more of their brand of cards.
This is pretty much of a non issue too, as there are plenty of software programs that can do stitching for panorama photos.