Your problem is that your camera is totally incapable of formatting an xD card of that large a capacity. You have an older 3.3 megapixel model designed when the maximum xD capacity planned was 512MB and the largest capacity available was 256MB.
Your camera will work with a maximum 512MB xD card but cannot use larger capacities. 512MB should be plenty though as on the fine setting it allows you to store about 330 images and on the normal setting it's 665 images. On the two video resolutions it's about 53.5 minutes and 182.5 minutes although on the lower resolution the battery would run out long before 3 hours!
There are no firmware updates to extend the capacity as it's a hardware limitation in the camera itself. Even if it could handle larger capacities then the camera would become very sluggish in operation. There's even a noticeable slowdown in camera response when using 512MB cards, so I recommend that you stick to a maximum of 256MB (you can always carry extra xD cards with you if you want additional capacity).If you would like a free download of your camera user manual then click here for one from the Fuji website.
You only have two fixes: replace the xD card with a maximum 512MB capacity (preferably 256MB), or replace your camera with one of the recent models which accepts the 2GB xD card.
I hope that I have provided you with a clear explanation and practical options to fix your problem. Please take a moment to rate the free answer I have provided for you and
any testimonial which you might wish to add is always welcome!