Do you actally need a hard drive at this point I did not think that you did.
No you don't need a hard drive...so if it WAS the hard drive, then the setup should have gotten past that point in which it freeze once you removed the HD.....windows simply loads up a program from the winXP disk and then it tries to locate hard disks but doesn't require one at that point..
Ok...off ebay huh? Did the seller say it was brand new? Did it look completely unopened or what? My point being was it new to you, or was it an actual brand new drive someone was selling off?
At this point all I can think of is your dvd-rom or RAM since you say when you disconnect the HD it still freezes at that point....
How long have you waited at that point btw? Because I've known it to take longer than it should sometimes and then it kicks in, but I'm assuming you've sat there and left it....made a sandwhich...came back and see if it's still froze? Just a thought.