This took /way/ too long to work this out... so posting here in the hopes it will help someone else.
So basically my friend has Windows 7 Ultimate and had 'set a password' on her cheapo USB disk. She then found out she couldn't use the disk on anyone else's computer. She knew the password, she just wanted it removing so the disk would work on other computers again. The disk had no files on it.
Turns out this password protection is IEEE 1667, and the only real world implementation of this appears to be in Windows 7. It's implemented at the hardware level, so if you try to use the disk on any other OS you get zilch. Nada. NOPE.avi
What we finally figured out is that if you type your password incorrectly upon plugging your disk in, you get an option to 'reset' the device. This wipes it clean and removes the password protection, and makes it work on other systems again. Obviously, note the 'wipes it clean' bit there -- you should back up the contents of the disk before resetting.
God bless Microsoft usability...