Re-reading your original message, I just wanted to throw this in, in case we were missing the obvious.
There is a setting somewhere (I can check where, if this is the case) to allow XP to detect the contents of new media and automatically pop up a list of actions. This may have been turned off.
For example, a compact flash may cause a window with "open in explorer", "view slideshow", "synchronise" etc to pop up. Inserting a blank cd may give "burn image" and "backup" etc. Is it this which has STOPPED happening?
In answer to your other question, yes, the cf reader should appear as a "removable drive" in "My Computer". It may be worth noting also that a lot of cf readers will not allow the "hot changing" or cards. You may have to unplug the reader, swap CF cards and plug the reader back in for windows to recognise the change.