Well sort of….
This morning I began the process of systematically diagnosing the problems, something always better done after a good night sleep. I unplugged all of the IDE devices and then through a process of elimination worked got the hard disk back without the CD. For a while I thought the problem was with the IDE cable so I got a new one from Dick Smith. Plugged the CD into the second IDE port and still no luck, at one point the PC would not boot again. Panic!! It seems that without the CD everything works fine, even the new keyboard which I am typing this post on.
So off to the shop for a new CD drive. I am going to look at one of the combined CD/DVD writer combos. I can then look to backing up on DVD.
I also found some good deals on eBay for internal drives (250GB) that you can add a casing for just of $250 which also seem like a good deal. A new backup process will be setup so if this does happen again at least I will have the data.