Wait... is your SanDisk USB disk one of those SanDisk drives with that horrible U3 software installed on it?
ok, this really weird and embarrassing. I tried a generic 1 gig flashd. and the mcboot worked like a charm. I really cant believe crappy generic flash disk works better then a SanDisk.. way to go sandisk.
It hasn't happened to me yet - but it's been reported (by some) that the U3 software may cause PS2 homebrew that accesses the USB device to malfunction.
If you have that U3 software on your Sandisk? If you do, try wiping it with SanDisk's U3 remover (Make sure that it's meant for your model!!).
Unmodified SCPH-77006 with SM 3.6
SCPH-39006 with M-chip modchip, SCPH-10281 NA and refurb Seagate 80GB HDD
SCPH-10000 v1.00 with SCPH-10190 PCMCIA NA and SCPH-20400 HDD unit