Correct. You need to format it to FAT16 known as FAT. Once you have v70 kernel loaded OK on the Elonex, after using the FAT SD card to update the Elonex, you can load the Large Driver support and then you can reformat the SD card back to FAT32 and it'll work OK. That's how I read it, but my SD card has always been FAT so has always worked whichever way....
As I'm sure you know, when you re-format something you lose all data on it. Also, you reformat the card using Windows, and not the Elonex.
Hope this helps....