I just got a new 1gb flash drive and was having problems with performance, I was like WTF? After a bit of research it looks to be a bunch of different problems. They use fat32 for optimal compatibility and ease of removal. All this goes away if you convert to NTFS, but you have to go into the device manager and change the drive properties optimize for best performance.

http://blogs.msdn.com/oldnewthing/archive/2004/04/05/108205.aspx
http://www.uwe-sieber.de/usbstick_e.html