I just bought a brand new USB flash drive and want to format it, but what does Allocation Unit Size mean?

it's referring to sector size in a ntfs file system the default is 4096 kb but flash drives are usually formatted as fat for compatibility other o/s's but as yours is an 8gb you should format it fat32 because fat can only support up to 2gig but if you only intend to use it on xp or vista machines a ntfs file system will be ok