Would it be possible to format the card as ext2/3 to over come this limit? Is support for ext2 in the kernel, or would that require an additional kernel?

This would require editing /usr/sbin/mmc-mount, but I don't see that as a big deal.

If ext2/3 support was present what I would do is create 3 partitions. A swap partition, a large ext2, and a small vfat. On the vfat I would include an installer for one of the many Win32 ext2 filesystem drivers for the occasional time I might plug into a windows box with usb or via a card reader. Although I don't really have need for files over 2Gib or an 8GB card even.