There must be something going on with the way ATV Flash creates the bootable partition on the flash drive. I have a Sandisk Cruzer 4GB that I have used successfully and flawlessly to patch my ATV with the ATV Patch (.com) patchstick. I know that the ATV can mount and read it because it absolutely worked with the ATV Patch.
Why, then, does my ATV not boot off of it when using ATV Flash? Tell me that and you get a cookie. I think the developers have more work to do.