If you go into "Settings" page 6 and tell the iLiad that any of the four standard doc types (News, Books, Docs, Notes) are on the CF card, it will automatically create the four corresponding folders on the CF card, and pressing the appropriate button on the iLiad will take you straight to that folder.
I don't know why I had problems with FAT32, but it just didn't seem to want to work for me. Reformatting the card as FAT has made it work fine - this is with a 2GB Sandisk CF card.
I've always been wary of "hot" plugging and unplugging memory cards - too much potential for corrupting files. The manual makes no mention of whether or not its a "safe" thing to do.