In Windows XP you had to format from the command line if you wanted to use 720K floppies (there was a command parameter you need to add to the command).
Windows XP itself would not allow you to do a fresh 720K format from its GUI, only from the command line. I think it would allow you to re-format disks already formatted in 720K from the GUI, though.
Maybe it's a similar thing with Vista.
I'm sure Googling will let you know the answer to this one.
