Sounds to me like you did everything right (even the chickening out part).
Your original drive might not have had it's jumper set to master, even though that sounds kinda far-fetched. Or, the slave jump wasn't right. (I kid you not, I've sworn I did it right, only to find I was off to one side or the other)
I say that because that message seems like the computer read the unformatted western digital and thought "hey, no can boot to this!"
Your new hard drive is not formatted yet.
The CD is used for that, but other ways exist also.
If, for instance you were to unplug the original drive ...
Use just the new WD 250MB hard drive.
The OS is gone, and so you'd have to load it on.
To do that, you'd have to format it. partition it, and then you could
load the windows onto it.
If you have a windows CD, then all that could be done.
A fresh load.
If you think ahead, you make three partitions at the point in the "pre-loading"
that asks you what you want.
A primary partition of 20GB.
It does it, and then you are back to that screen to make another decision.
An extended partition, this time.
Say, 30GB. It does it.
(You also had to say to those DOS questions, use the large drive option, since 250GB is more than the 30GB max for "small drives", but you only say that once)
One more time, and you make the rest of the drive (about 200GB) the second extended partition.
Not exact in my examples, but close.
Now, you have a formated (for windows, large drives, I presume NTFS file system) and partitioned drive, but no windows.
If you stop there, the drive is now a "windows type formatted drive" and if you put the original drive back into the master position and the 250 in slave, your situation has changed.
You will have a master drive, seen as a primary drive with a windows operaring system on it. It will boot up. The slave will be seen as a drive that windows recognizes, because it is formated and partitioned.
Now, another thing is this:
The BIOS should see that drive no matter what (formatted or not).
It should also be seen as HD1, not HD0. Your BIOS has a boot sequence.
That sequence is some combination of these threee 'devices"
the floppy disk drive.
the CD-Rom (or any optical drive)
the Hard Drive (now it's two of them)
so it has to be the HD0 (the original one) check that, to be sure.
Back to the other part.
As long as the 250GB drive is in the slave postion (actually any slave position HD) you may have an operating system on it, that will not be booted to.
So, you could have continued to load your winXP (or which version do you have?)
onto it and to that 20GB partition at that. You'd then have a spare, fresh, backup complete OS to use if you ever wanted to put the 250 into the master position.
And still have 230 more GBs to freely use.
anyway, I say what I've done, to illustrate matters.
That CD from Western Digital is the key.
You should be able to read what it can & can not do.
I used a Maxtor MaxBlast disk when I added a 120GB drive.
Seems the first time I used it I installed it to my original drive.
It "told me" I couldn't use it to partition/format any boot drive.
Then I added the second one just like you did, unformatted.
Then I checked BIOS, and after that, I let it boot.
I opened up the installed Maxtor program and it saw the HD, asked me what I wanted to do.
I said make it a "storage disk" and proceeded to divide it into a piechart
three partition job using the nice and easy program.
10 minutes later the OS saw everything it wanted to see.
I double checked in the system administrative tools-->computer management-->disk mangement and saw the confirming data presented, just like I wanted to see.
So... thats no answer, you say.
You are right, it isn't.
I think I just talked about winXP pro from a CD using Maxtor HD, two of them.
I do think you have the answer within your finger tips and in using that CD.
I simply can not say exactly how.
Don't know your details, exactly.
You do, though.
It's just sorting them out.
You (and I would have) chickened out because you haven't ever done it before,
and all your questions about it were not answered by what you read.
Try reading more ... heck, ya' read this didn't ya'?