aah...so, I found the solution last night after messing around with the drive for half an hour or so..
Note: This will remove all data from your Thumb Drive
Lemme post the complete analysis.
It started with me trying to install WindowsServer from a thumb drive because my ROM was not working. I even made a thread on BP about it. Installing Windows Server from USB
Anyways, in the process of doing so, I messed up my thumb drive while following some of the instructions on a site. I was trying to make a bootable thumb-drive from Windows 7 using DiskPart when this happened. After this it had stopped working and kept giving the same errors the OP has in this thread
Solution: What I did was go with the DiskPart utility in Windows 7 ( I guess its the same for all MS OSs) and format it using these commands.
SELECT DISK 1 ( DISK 1 = USB DISK)
CREATE PARTITION PRIMARY
SELECT PARTITION 1
(Format process may take few seconds)
This solved my problem, hopefully it does yours.