Sorry to bring up an old topic, but I just had the same thing happen to me and since this was the first thread I came across, I wanted to add in a bit more information to help future victims.
First, there is no reason to format the device. Instead, once you get your reader to a state where you can see it in windows explorer or mount it in Linux/OSX, go to the directory \database\cache\ and rename media.xml to media.xml.bak. You could probably just delete media.xml, but the site I was reading suggested just moving the file and I didn't want to risk further frustrations.
Second, when speaking to a Sony rep, he gave this suggestion for resetting the device:
1. Hold the reset button for 20 seconds
2. Press the power switch twice.
I had to do this about three times before it accomplished anything, but eventually the device restarted once and then a yellow light started blinking. The first time it worked, the device was not plugged into the PC, but I have no idea if that's important. At that point, the procedure can be repeated and during the restart, plug the device into the computer. As long as you plug it in before it tries to process media.xml, you will be put into a usb mode and can make the modifications necessary.
(Media.xml information obtained from
http://wannemacher.us/?p=238)