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As the others have said, recent firmware are putting up the "format as FAT32" message more often. I have always seen it and took it as a sign that I hadn't inserted the card cleanly. But, it happens more often than not now, and I just ignore it. But, it sounds like something else is going on.
From your symptoms, I wonder if the card is faulty. The error when reading a book sounds like it is not able to read the book properly. Is the error happening when you navigate to a new chapter? A new chapter is usually a separate file inside the epub and is likely to cause a read from the card.
The same goes for with missing books. If there is a problem reading from the card, then it might not find all the books.
I don't know how to test a micro SD card. There are probably tools to do it available on the web. But, do you have another card you can try? If it works, then it probably is a problem with the current card.
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