Probable Rootkit
I had the same problem back in May'09. Flash drives would not get a drive letter but appeared in device manager. Other USB devices worked, including my external WD hard drives.
No AV or anti-spyware could find it. I started looking for rootkits and finally found a freeware tool gmer.exe (don't remember from where but it should be easy to find). This nifty little tool found the ovfsth*.sys rootkit and included tools for isolating and cleaning it. Rootkit_Detective.exe by McAffe (also free) was also helpful because it too saw ovfsth*.sys and renamed the files so they couldn't be loaded on the next reboot.
In short, both these tools work by accessing files and the registry directly rather than through the standard Windows API. This rootkit was able to hide itself by setting properties and permissions that made the Windows API believe it was an internal system file, and registry entries, which even the Windows API hides from view.