The aTV Flash installation process does not start while the flash drive is connected when the Apple TV is powered on. The Apple TV just starts up normally.
Use an alternate flash drive sized 256mb or larger.
Note: If the drive has any U3 software installed, it must be removed prior to installing aTV Flash.
Most U3 smart drives come with an uninstall utility that converts the U3 smart drive into a regular USB flash drive. This utility can be accessed from the U3 Launchpad. Open the U3 Launchpad and click on Settings, then select U3 Launchpad Settings and click on the Uninstall tab. Some devices have a link to the Uninstall utility under Help and Support.
If you can not find the uninstall utility on your U3 smart drive you can download it from the following locations: