When the power supply went out, the cpu fan stopped spinning and shortly after the processor and more than likely the motherboard burnt up.

I'm starting to suspect that either (A) The hard drive was spinning when the PS went out, and when it lost power the HD arm lowered and dug into the platters... or (B) When the PS went out there was a pretty serious spark that came out the back of the PC, and it may be that the hard drive might have been given way too much juice to handle.

Apparently this TATTOO business only pertains to HP recovery disks and therefore this shouldn't be a problem for me.....

Yes, I am glad you said and did that. So the 40 gig won't work as a slave or master in the compaq computer, and you have tried putting it back in the orginal computer.........to see if it is still working at all. It might be a hard disk controller error or an internal sensor error on the drive itself.

At this moment, I have another spare HDD hooked up as the master with the problem HDD set up as the slave. The first time I turned the machine on, it does a basic diagnostics test, shows the CPU-RAM-etc. and also shows both HDDs and the CDROM. When BIOS loads, both HDD are present. In the boot menu, again both are present. The PC boots from the older, master HDD, and shows no signs of recognizing the slave.

I then restarted the machine, and it was gone...

by the way, the "spare" drive I had, is a 6GB from 1998, so obviously it is a short-term fix. I do not have another machine to try and test the drive in, and as I said previously, the original machien that this drive came out of is completely dead.

Ok, one other thing - is the hard drive getting hot?

Yes. Fairly quickly too.

It's difficult to tell if it is spinning or not because this cheap Compaq case doesn't secure the CDROM very well, so when the cd spins up it feels like everything in the case is shaking.

I tried it without the CDROM hooked up and it is definitely making noise (normal noises, not grinding or clicking) and feels/sounds like it's spinning.

Ok, it is just my opinion but I think your smart drive sensor has trip or your drive has overheated and the platters have scortch, although not absolutely dead it will be.
If there is anything on the drive you want to keep, there is a technique called "slamming" where the drive is wrapped air tight and frozen. Depending on how long your freeze it you may need to slam the HD to unstick platters or arms---put it in the computer (make sure it is cold and dry completly) as a slave and transfer what is important to the master as quickly as possible. ((((((WARNING...there is a danger of electrical shock, and complete system failure))))) or take it to a recovery company...or toss it in the trash or sell it on eBay as a dead hard drive (because the HD controller might still be good)

Hello are you putting the hard drive on same IDE cables as CD rom?

Or IDE port/connection only ment for CD/DVD roms?

If yes this maybe the problem.

It does seem the hard drive has or is failing.Have you got a kit or cables to make it external and see if it will be reconised that way?