File format has nothing to do with whether you're loading homebrew correctly or not; I would recommend that you use FAT32 none-the-less, for it does have no cons compared to FAT16.
M3 Sakura is the problem in this case, like Originality said, so I would load up the M3-Sakura-Itouch firmware instead of just the Sakura one so you can switch between Homebrew-compatable M3 firmwares and Sakura.
I've never heard of using Default skin to do that; I'll have to try that someday. By the way, JereTHEend, do you know whether you have to use the default wallpaper or can you just rename your existing skin to the default name?