I have attached a link that I found after going through a ton of problems using a usb floppy trying to install drivers for windows. It appears Windows XP only supports certain drive type to load drivers during install. Everything appears normal and it lets you select the drivers, but then during install process it will prompt you to put the floppy in over and over.
Figured this might save some folks some time and money.
http://support.microsoft.com/default.aspx/kb/916196/
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