I dont' understand this completely: How do you use your CF card exactly?
When I use my CF card the 'normal' way (using the 'CF' link in ContentLister) the iLiad doesn't create four roout folders as you describe. Additionnaly, I have formatted my CF card as FAT32 and it works like a charm.
I can insert/remove the CF while the iLiad is on, even while I'm reading a document from the CF at the time - the document simply closes and I'm directed to the main menu. In the past I had some problems: sometime the CF card wasn't recognized until after a reboot, but that problem seems to be solved by now.
Regarding the card size: I don't know exactly, but my 1 GB CF card works perfectly!