Try the drive on a known good working system other than yours.
Info re out of range message: http://support.microsoft.com/kb/286331
Are you booting the system with the external drive attached and on? What happens if you boot with it off (but attached)?
Sometimes...having USB devices (other than monitor/keyboard) attached results in XP trying to boot the USB device, rather than the C: drive. You might check your boot order in the BIOS, just for the sake of verifying.