It will not proceed with the setup
it keeps prompting the same thing even when I accept "OK"
http://i30.tinypic.com/2l8k8jq.jpg

Assuming you are using a floppy:

First off insert Floppy then right click A: under My Computer.

Then choose Format...

Quick Format.

Then try again.

I know this may seem unrealistic.
I don't own any. - I ought to purchase a few?
sorry - any other alternatives.

You could burn it to a CD but I also just read the Notes:

"Does not support external USB or Firewire attached drives. "

Sorry.

Can you post a screenshot of how it reads in Disk Management?

Just for example: