Well, I've found that Windows had a built in logging service for Windows setup and device installation. In XP the log is located at C:\windows\setupapi.log
I deleted the existing log so that a new one would be created. This is the contents after plugging in a USB stick:
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[SetupAPI Log]
OS Version = 5.1.2600 Service Pack 3
Platform ID = 2 (NT)
Service Pack = 3.0
Suite = 0x0100
Product Type = 1
Architecture = x86
[2013/03/19 10:30:11 804.3 Driver Install]
#-019 Searching for hardware ID(s): usb\unknown
#-018 Searching for compatible ID(s): usb\unknown
#-198 Command line processed: C:\WINDOWS\system32\services.exe
#I022 Found "USB\UNKNOWN" in C:\WINDOWS\inf\usb.inf; Device: "Unknown Device"; Driver: "Unknown Device"; Provider: "Microsoft"; Mfg: "(Standard USB Host Controller)"; Section name: "BADDEVICE.Dev".
#I023 Actual install section: [BADDEVICE.Dev.NT]. Rank: 0x00000000. Effective driver date: 07/01/2001.
#-166 Device install function: DIF_SELECTBESTCOMPATDRV.
#I063 Selected driver installs from section [BADDEVICE.Dev] in "c:\windows\inf\usb.inf".
#I320 Class GUID of device remains: {36FC9E60-C465-11CF-8056-444553540000}.
#I060 Set selected driver.
#I058 Selected best compatible driver.
#-166 Device install function: DIF_INSTALLDEVICEFILES.
#I124 Doing copy-only install of "USB\VID_0000&PID_0000\5&3777BD40&0&7".
#-011 Installing section [BADDEVICE.Dev.NT] from "c:\windows\inf\usb.inf".
#-046 Processing Coinstaller registration section [BADDEVICE.Dev.NT.CoInstallers].
#V132 File "C:\WINDOWS\INF\certclas.inf" (key "certclas.inf") is signed in catalog "C:\WINDOWS\system32\CatRoot\{F750E6C3-38EE-11D1-85E5-00C04FC295EE}\nt5inf.cat".
#V132 File "c:\windows\inf\usb.inf" (key "usb.inf") is signed in catalog "C:\WINDOWS\system32\CatRoot\{F750E6C3-38EE-11D1-85E5-00C04FC295EE}\nt5inf.cat".
#V132 File "c:\windows\inf\layout.inf" (key "layout.inf") is signed in catalog "C:\WINDOWS\system32\CatRoot\{F750E6C3-38EE-11D1-85E5-00C04FC295EE}\nt5inf.cat".
#-166 Device install function: DIF_REGISTER_COINSTALLERS.
#I056 Coinstallers registered.
#-166 Device install function: DIF_INSTALLINTERFACES.
#-011 Installing section [BADDEVICE.Dev.NT.Interfaces] from "c:\windows\inf\usb.inf".
#I054 Interfaces installed.
#-166 Device install function: DIF_INSTALLDEVICE.
#I123 Doing full install of "USB\VID_0000&PID_0000\5&3777BD40&0&7".
#I121 Device install of "USB\VID_0000&PID_0000\5&3777BD40&0&7" finished successfully.
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and this in the relevant content of setupapi.log after plugging the same USB stick into my Dell laptop also running XP SP3:
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[SetupAPI Log]
OS Version = 5.1.2600 Service Pack 3
Platform ID = 2 (NT)
Service Pack = 3.0
Suite = 0x0100
Product Type = 1
Architecture = x86
[2013/03/19 11:37:14 1016.3 Driver Install]
#-019 Searching for hardware ID(s): usb\vid_090c&pid_1000&rev_1100,usb\vid_090c&pid_1000
#-018 Searching for compatible ID(s): usb\class_08&subclass_06&prot_50,usb\class_08&subclass_06,usb\class_08
#-198 Command line processed: C:\WINDOWS\system32\services.exe
#I022 Found "USB\Class_08&SubClass_06&Prot_50" in C:\WINDOWS\inf\usbstor.inf; Device: "USB Mass Storage Device"; Driver: "USB Mass Storage Device"; Provider: "Microsoft"; Mfg: "Compatible USB storage device"; Section name: "USBSTOR_BULK".
#I023 Actual install section: [USBSTOR_BULK.NT]. Rank: 0x00002000. Effective driver date: 07/01/2001.
#-166 Device install function: DIF_SELECTBESTCOMPATDRV.
#I063 Selected driver installs from section [USBSTOR_BULK] in "c:\windows\inf\usbstor.inf".
#I320 Class GUID of device remains: {36FC9E60-C465-11CF-8056-444553540000}.
#I060 Set selected driver.
#I058 Selected best compatible driver.
#-166 Device install function: DIF_INSTALLDEVICEFILES.
#I124 Doing copy-only install of "USB\VID_090C&PID_1000\FBB1003302200048".
#-166 Device install function: DIF_REGISTER_COINSTALLERS.
#I056 Coinstallers registered.
#-166 Device install function: DIF_INSTALLINTERFACES.
#-011 Installing section [USBSTOR_BULK.NT.Interfaces] from "c:\windows\inf\usbstor.inf".
#I054 Interfaces installed.
#-166 Device install function: DIF_INSTALLDEVICE.
#I123 Doing full install of "USB\VID_090C&PID_1000\FBB1003302200048".
#I121 Device install of "USB\VID_090C&PID_1000\FBB1003302200048" finished successfully.
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It seems to me that the process is failing right at the start with Windows failing to detect the hardware ID of the USB stick, therefore installing it as an unknown device.