As the intensity difference between two levels drops below about 10:1, I find that I don't need the difference and if I have to work around an intermittant level, I would rather not have it. As others have stated with the U2, the dial is easy enough so no harm and no foul but I also add my vote to a lower level than currently available. If time is available for adjustment and the illumination task will be of any significant duration, then having more levels and dialing the level into the specific needs of the situation at hand is certainly a plus and worth the effort probably. Heck, even in my house where we have simple rotary dimmers on the wall, I usually either just crank the light on in its lowest setting or crank it on to high. /ubbthreads/images/graemlins/blush.gif
With a portable and "temporary use" flashlight, the returns of value, certainly beyond 3 levels and likely beyond two levels do not justify any significant increase in cost or access to these levels, IMHO. I think beyond a few levels of output, any complexity or cost inherrent in the light should be directed towards variation in the directivity of the light produced; that is the shape of the beam and distribution of the light. As the flux of the newer LED's increases, I too see merit in going from two to 3 levels of output but unless the distribution of the light itself becomes variable, the potential of these higher output lights will not be fully realized!
If you have 100 lumens of light for instance, I would go for a light that has 1, 10 and 100 lumens of output. However 1 lumen of output is not nearly as useful in a thrower as it would be in a flood beam. By the same token, 100 lumens is not as useful in a flood beam as it would be in a thrower, in most cases.
My comments are based on the assumption that the light is actually going to be used for some reason and not just turned on for the sake of wow or isn't that amazing. For the latter, I think 256,000 levels would be cool and perhaps a woofer tuned to the PWM duty cycle might please the ears as well as the eyes getting a treat!