I think iRex said in the past that the reason 2GB cards don't work is that the software (maybe hardware too?) is only capable of addressing memory ranges up to 1GB. What may have happened is that when you put in a 2GB card, it messed up stuff in the software enough that other things started getting flaky (like the battery meter).
There shouldn't be any long term effects though, swapping out the card should be enough to make it fully functional again. You should be fine with the 128MB card. Check the Wiki on here for a list of SD cards that are known to work with the iLiad in case you want to get a 1GB card.
https://wiki.mobileread.com/wiki/Iliad_Memorycards_list