Ok, now I've reverted back to OS2006 and it still doesn't work.

I formatted the MMC using a card reader but still no luck.

If I flash the firmware it should delete everything, right?

On my old installation I changed the kernel so it enabled USB Host mode which meant I had to xterm and change it to normal USB mode to hook it up to the computer but I thought flashing it would revert it back to its default mode.

Hmmm...