In trying to solve this problem, I came across these two articles regarding GRUB and USB booting.
http://vlinux-freak.blogspot.com/2011/01/how-to-create-grub-boot-floppy-usb.... http://bootloader.wikidot.com/linux:boot:usb-grub
The floppy drive issue appears to be the situation as booting the rescue environment from a USB DVD does show up as /dev/fd0.
However, the solutions in those articles did not work. In the first, the GRUB command/options are different, although changing the option from boot-directory to root-directory appear to work, there was no option to force floppy drive.
In the second, the python script thinks the grub install has already been patched for floppy boot so couldn't do anything.
I've also tried editing menu.lst to use (fd0) but also didn't work.