That's a really good point. The OS can easily be distributed (and should be) in both forms: one to be run from CF, the other a direct install. Both forms would be substantially the same, it wouldn't be hard at all.
Adam makes a good point, running from CF would actually take more technical skill than running a simple installer program.
Hmm... here's a thought. Currently, (if I understand correctly), the idea is to have a simple program that users would run on their iLiad. This program would attempt to connect to the iLiadOS server and download the most current version to /mnt/protected, at which point the iLiad performs a standard OS upgrade. After that, iLiadOS would handle its own upgrades using a similar technique.
Why not have a second program that looks for a CF card, prompts the user for confirmation, formats the card to ext2/3, then downloads iLiadOS from the server and installs it on the card? I think that this would be a fairly easy script to write, and it would be just as easy for "Joe User" as the regular install.
This would basically be analogous to Ubuntu offering options to either install on the computer or run from CD.
Edit: Oh, snap! Nekokami beat me to it.