I have formatted the USB HD as per your instructions using Acronis True Image Home 11.0, which I already had.
The options shown in the utilities are a little different, it had no option to choose drive letter or 'make active'; however, it made it active by default as I checked in Windows XP disk management and it was shown as active.
Is assigning a letter essential? I guess this could also be changed with Windows disk management.
Anyway, I got the same "wbfs error : bad magic"
I have searched on google, but I can't find much info on this error. The few posts that mention this error seem to talk about a WBFS partition or NTFS.