Just go to System -> Card -> Save -> Song\Ptn - this will save your patterns and songs to the flash card.
Next go to the System -> Card -> Save -> Sample - select from which internal bank from and to which backup slot you want to save the sample data (totally 12 backup slots). Note that a * before backup slot indicates that the slot is already used - but you can proceed with overwriting it if you wish.
When you saved all you sample banks to flash card and sequencer data also you want to clear internal memory.
Now go to System -> Utility -> Init -> SAMPLE -> Execute - this will clear all internal sample data from all internal banks (except for preset sounds of course).
Then go to System -> Utility -> Init -> SEQ -> Execute - this will clear all sequencer data (songs and patterns).
Thats all now you have a clean and fresh setup.
Of course you can always hit FORMAT CARD on the sampler and this will also format the card (just remember first to copy your backups to pc). Or even if you like in the INIT screen click INIT -> ALL this will everything at one step (even reset the settings).
Yes, they work with 505 - I use one myself. As max supported SM card size was 128 MB then max XD card size is 128 MB. Of course you can try even bigger cards - maybe they will work - but I actually don't see any use for that because with 128 MB you can have up 1 hour of sample data in mono which is very very very huge amount of sound compared to EMU SP1200's 10 seconds of sample time!