I think that setting is so that the DPI (dots per inch iirc) value is calculated correctly. Which affects the font sizes. Maybe you guys have a different problem, I'm not using Intel but I had exactly the same symptoms with ATI.
Check the /var/log/Xorg.0.log
logfile, I just searched for DPI and found this:
(WW) fglrx(0): Probed monitor is 2550x2550 mm, using Displaysize 155x95 mm
(**) fglrx(0): DPI set to (104, 128)
(--) fglrx(0): Virtual size is 640x480 (pitch 640)
If you guys have sane values there then I guess it is not the same thing.