This may or may not be a stupid question... but the IDE cable is plugged in correctly, yes?
I was 'dry-running' my X-Bit, and had the DVD and hard drive tray sitting outside of the XBox, and I plugged the IDE cable into the socket without looking, I just went by the natural bend of the cable. Well, now that the drives weren't in the same place they usually were, I was basically putting the cable in backwards!! While it was in backwards, I'd get nothing but FRAGs. Once I plugged it back in correctly, everything worked like a champ.
The red stripe on the IDE cable goes towards the front of the case on the Xbox- at the end of the connector that has a small arrow pointing towards it (on the circuit board.)
Red stripes also go towards the power cable on the HD/DVD drive. Check those out, and if they're proper, it wouldn't hurt to put in a new IDE cable before giving up all hope!