I'm no expert by ANY means... so please don't take my word as law... however... I have done a bunch of reading and the 'feeing' I get is the following.
FAT32 for most works just fine. Most people seem to be using FAT32 with default block size. Certain adapters and certain memory stick combo's may experience a difference in performance depending on the memory type (i.e. its speed Class, size, and quality).
Using a card larger than 2gb? Then FAT16 won't work. It doesn't register more than 2gb. You need FAT32. However you CAN play with filesystem block size to -try- to tune performance. Maybe.
My attention has lately been focused on the microSD cards, as that is what the M3 Real on my list supported. I believe in that case, FAT32 with default block size works fine, especially for the SDHC (high capacity) models.
I ran into the following WIKI, which apparently has some unofficial tests/results posted of the M3 with various types/makes of memory sticks, etc. Though I don't see any SDHC memory test results.
You'll see that in some cases with certain memory types going FAT 16 with a larger block size, has improved performance on certain cards for certain ROMs. Their standard seems to be CastleVania.
What is Secure Digital? This WIKI has more info than anyone would probably need.
Go with a mainstream SD card manufacturer. I.e. Kingston or SanDisk.. but its ultimately up to you.
Some profess Japanese made Kingston SD's are better.. but that may be rumor. I didn't fall for it.
I have seen a few Sandisk SDHC owners (4gb and6gb), they say it works just fine! I bought a 6gb HC myself.
Go with a faster Class memory stick if you can, i.e Class 4 over Class 2.
Class 2 is slowest for general use.
Class 4 is faster (for fast photography and such), and likely what you should shoot for.
Class 6 is fastest 'professional' grade, though you pay more. They are likely a little harder to find.
When looking to buy SDHC memory, I found most 4gb SanDisk SDHC cards to be class2. Most 6gb cards were class4. Again, I didn't look all over the internet, only a few key outlets which I typically do business through. The wiki above mentions SOME 4GB SDHC cards, possibly others, DO NOT meet standard speed classification rules! So be careful what you are buying.
If you don't know the speed class of the stick. By all means ask or get a part number for the retail package and research it! Google is a wondrous tool.
**I forgot to add:
Some microSD/HC cards come with their own USB adapter. Use this to format your card on your PC. The M3 Real comes with a microSD adapter, but I saw one person complaining that they couldn't format their SDHC card with this properly, by switching to the Sandisk provided adapter, their card worked fine. Some have reported that the M3 SD adapter is rather cheap 'feeling'. Ultimately you may need to play around and see what works best for you.