The E20 FAQ from Olympus says that CompactFlash-interface microdrives up to "1gig" are supported. That doesn't necessarily mean that bigger cards won't work, though — unlike SmartMedia, CF doesn't require device support for larger capacities, since there's a standard interface with "smarts" in the card itself. ("Smartmedia" is an Orwellian misnomer; it's the exact opposite — which is one of the reasons it failed to catch on.)
But, it's also very likely that there are other limits that prevent a card much larger than the expected to work. (For one thing, you may run into a limitation on FAT volume size.) You could chance it — it may work. Or you can get a 1GB card which will almost certaily be no problem.
Update: this forum post confirms that the older FAT format is used, and that you're limited to 2GB Compact Flash cards. (As noted above, 128MB is the limit for SmartMedia.)