A quick primer: To store the discreet information for every single pixel in a 7MP photo would take something like 23MB of space. Compression allows the camera to minimize the size of that file by more efficiently storing redundant information. A .CRW raw file for a 7MP picture might be something like 6-7MB. The compression in a .CRW file is lossless, which means that when decoded, every piece of information that went into the file can be retrieved (like a ZIP file). JPEG files are compressed, but using a "lossy" comression method. It looks at blocks of colors and, taking advantage of the limits of the human eye to discern subtle changes in color, sort of averages some of the colors out. (I'm not an expert on JPEG, so this description might not be exactly accurate - but I think close enough.) The point is, in the process of compressing the file, some data will be lost. There is also the ability when applying JPEG compression to define how "agressive" it is at discarding detail for the sake of file size. Generally, on the first save at super-fine quality, the loss is not really noticed. However, each future save in JPEG format will slightly degrade it more and more. So its advisable to keep the quality as high as possible, to keep that degradation minimized.
I would also agree with choosing to reduce resolution before reducing the quality (i.e. increasing the compression). You can still get a decent 8x10 out of a 4MP picture, but once compression artifacts start creeping in, its hard to recover.
Though, my personal recommendation would be to always shoot super fine and large (if not raw) - CF cards are getting pretty cheap, and you never know when you'll get that perfect, once-in-a-lifetime shot...