Insert your usb key after firing up your virtual machine 2.06.
You will see the the “Found new hard ware pop up”
Click not this time
highlight “Install software automatically recommended”
The software that your are installing is not verified by windows will pop up
Hit continue any way
The wizard has installed software for your virtual machine pop’s up and you are all done.
Unplug your usb and plug it in again.
You should be able to see your usb mounted on the desktop.
This worked for me.
Windows XP home is the host
Ubuntu 8.04 is the guest OS