As far as why it didn't work.. can't help you.. we just did the same steps in order as they were supposed to be done. No idea how you ended up with an 800mb partition the first time.

Your setup now looks perfect. 1.6G /, and a 125mb FAT on /media/mmc2. That is what you should have. You are working and ready and to do whatever you want.

Don't throw away the other card... I highly doubt there is something wrong with it.. just put it in and re-format it and use the whole 2gb as storage.