Hi,
You're not going to believe this... I spent about an hour trying to run the Windows 7 DVD/USB Tool
ON WIN 7 PRO.
I just happened to have a brand new SanDisk 8GB Cruzer Glide, and thought I would try and resolve this issue... And I did... but not in a satisfactory way...
I received the same error as you... nothing I did worked even though the drive itself was working perfectly...
I then tried a bulk MicroCenter 4GB Flash Drive... and it worked 1st try.....
I noticed that the SanDisk Cruzer was listed a "FIXED DISK", but the MicroCenter was listed as "REMOVABLE"
In the process of doing a search to try and find a way to change the FIXED classification to REMOVEABLE,
I found the source of the problem. The USB Drive needs to be "REMOVABLE" for the tool to work...
The new SanDisk drives are intentionally set to show up as FIXED as the result of a Microsoft requirement for Win 8 !!! This makes them somewhat useless as a bootable USB Flash...
The fix for your problem is to buy something other than a new SanDisk... an old one would probably work.
Check out this link for a bit more info...
http://forums.anandtech.com/showthread.php?t=2350787