OK, after much fannying around, I figured it out! I think...
If you have mixed playlists of music and videos, the 'full screen (with visuals)' option will automatically show full screen video for your videos and full screen visuals for your music, seamlessly moving from one to the other. If you select only 'full screen' the videos will play full screen, but the music tracks will just play with the iTunes app visible.
Kinda cool for parties and things I guess - if you have a few music videos.
Jx