Thanks for the reply! I figured out what had to be done eventually, thought i'd post what I did here incase anyone else had any similar issues.
Knowing I had the eeprom.bin that I had backed up when i had FTP access (thank heavens I had the sense to do that!) and also knowing the 10gb HDD was becoming faulty and slow, I decided to try my luck formatting a 160gb IDE drive I had laying about.
I used SID5 Pimpedv7 CD Edition (UnleashX) and burned it to a DVD, Disconnected the hard drives from my server and made sure the DVD drive was NOT on the first SATA connector, knowing that the software would be looking for the hard drive on the primary (I guess this is why people have conflicts with SATA drives being active in their PC's while trying to load linux) I then made sure the BIOS was trying to boot hard drive (on USB) first... I dont know if this made a difference but it worked!
The rest was easy from there as its all pretty much on screen, I made sure that I installed, added the extra partitions, and locked the drive.
As I said before, the errors I received before doing this step were:
Error 13 with all drives connected.
Error 7 with no DVD connected (guessing this is why I couldnt hot swap)
The hard drive worked well formatting and copying files on USB but was a bit slow (I used the SATA+IDE -> USB cable from Maplin Electronics)
Today I installed LED's into the Xbox Crystal and it looks LEET, also installed a USB socket into a memory card case and can run a 32Gb Adata USB stick off it... which actually works to my surprise.
Sorry to kinda Hijack this post with instructions regarding another installer disk... but I thought I'd post my findings here, Ndure looks great but its not 100% straight forward to use for absolute noobs like myself, plus someone might be looking for this exact fix for their issues.
My next task will be to make a cluster of xboxs seeing as 2nd hand shops sell them at £10! <--Absolute steal