We've had a discussion on the formatting of pen drives before. Use the command prompt format command to format in ntfs, or use the command prompt convert program. Microsoft doesn't want you to be able to have removable media formatted in ntfs so they removed the option from xp and vista's format. It is there in 2k and it can be converted after formatting.

Have you tried running a scandisk on the drive? Try running diskmgmt.msc and check the options for it in there. Does it have a drive letter assigned?