This was with the latest version of HP SmartStart 8.60 on a HP Proliant G6 server.
I started with a USB stick and also used an external USB floppy drive but kept getting the error each time I tried to save a diagnostics report. I could choose the drive and see that it was being accessed but still received an error. In the end I created a file on the floppy called survey.html (the file name that was supposed to be being created).
Bizarrely the software saw the file and asked to overwrite! Thereafter I could save any report to the disk.