Can you click on the "sort of there" drive? You don't say what version of Windows XP you are using. It is possible that there is a setting that prevents Windows from accessing the next available drive letter. (This is a stab in the dark.) Do you have any other USB devices that work?
First, make sure the USB drive works by trying another device.
Once you are sure the USB drive works, make sure that your USB port can accept the USB drive--there are different versions, USB devices are backwards compatible with older ports, but you should make sure.
Then try to figure out if there is a restriction on drive letters. If you have TweakUI, that will tell you what drive letters are available.