Same problem here under 10.04.3
Solved by creating a new fat32 partition using fdisk then running 
usb-creator-gtk through alt+f2.
After that, from usb-creator-gtk, erased the usb-stick which created a new 
partition on the stick and everything went okay from there.

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https://bugs.launchpad.net/bugs/529366

Title:
  Regression: usb-creator-gtk fails to set the boot flag on the
  partition and exits.

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