I'm currently defraging a 2gb usb that wants me to format it, attempting to get around this. The usb was 3% fragmented.
Running windows 7 RC on a HP dv6113tx laptop.
At present the defrag is upto pass 9 and at first I didn't think the defrag was actually working, it took a little while to kick in (10 seconds or so) and hopefully it defrags properly!
I've noticed an interesting side effect of defragging in Win 7.
After defrag, and for several computer restarts boot time is adversely affected.
By this I mean as much a 20 seconds are added to my low boot times.
My guess is that prefetch or superfetch is messed up by the defrag process and these folders need to be rebuilt.